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(Mark One)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 20-F
☐ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
OR
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2021
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
OR
☐ SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report
Commission file number: 001-38673
Arco Platform Limited
(Exact name of Registrant as specified in its charter)
Not applicable
(Translation of Registrant’s name into English)
Cayman Islands
(Jurisdiction of incorporation or organization)
Rua Augusta 2840, 9th floor, suite 91
Consolação, São Paulo – SP
01412-100, Brazil
+55 (11) 3047-2699
(Address of principal executive offices)
Roberto Otero, Chief Financial Officer
Rua Augusta 2840, 9th floor, suite 91
Consolação, São Paulo – SP
01412-100, Brazil
+55 (11) 3047-2699
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)
Copies to :
Manuel Garciadiaz
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017
Phone: (212) 450-4000
Fax: (212) 450-6858
Securities registered or to be registered pursuant to Section 12(b) of the Act:
Title of each class
Class A common shares, par value US$0.00005 per share
Trading Symbol(s)
ARCE
Name of each exchange on which registered
The NASDAQ Global Select Market
Securities registered or to be registered pursuant to Section 12(g) of the Act:
None
Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:
None
Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.
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The number of outstanding shares as of December 31, 2021, was 29,450,551 Class A common shares and 27,400,848 Class B common shares.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes ☐ No X
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934.
Yes ☐ No X
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their
obligations under those Sections.
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes X No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T
(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Yes X No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or an emerging growth company. See definition of "large
accelerated filer”, "accelerated filer,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
X
Accelerated Filer
Non-accelerated Filer
Emerging growth company
☐
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term "new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification
after April 5, 2012.
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report: X
Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:
☐
X
☐
U.S. GAAP
International Financial Reporting Standards as issued by the International Accounting Standards Board
Other
If "Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.
☐ Item 17 ☐ Item 18
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐ No X
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PAST FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Securities Exchange Act of 1934
subsequent to the distribution of securities under a plan confirmed by a court.
Yes ☐ No ☐
ARCO PLATFORM LIMITED
TABLE OF CONTENTS
PART I
Table of Contents
Presentation of Financial and Other Information
Forward-Looking Statements
Item 1. Identity of Directors, Senior Management and Advisers
A.
B.
C.
Directors and Senior Management
Advisers
Auditors
Item 2. Offer Statistics and Expected Timetable
Offer Statistics
A.
B. Method and Expected Timetable
Item 3. Key Information
A.
B.
C.
D.
[Removed and Reserved]
Capitalization and Indebtedness
Reasons for the Offer and Use of Proceeds
Risk Factors
Item 4. Information on the Company
A.
B.
C.
D.
History and Development of the Company
Business Overview
Organizational Structure
Property, Plant and Equipment
Item 4A. Unresolved Staff Comments
Item 5. Operating and Financial Review and Prospects
A.
B.
C.
D.
E.
F.
Operating Results
Liquidity and Capital Resources
Research and Development, Patents and Licenses, Etc.
Trend Information
Critical Accounting Estimates
Tabular Disclosure of Contractual Obligations
Item 6. Directors, Senior Management and Employees
Directors and senior management
Compensation
Board Practices
Employees
Share ownership
A.
B.
C.
D.
E.
Item 7. Major Shareholders and Related Party Transactions
A. Major Shareholders
B.
C.
Related party transactions
Interests of experts and counsel
Item 8. Financial Information
A.
B.
Consolidated statements and other financial information
Significant changes
Item 9. The Offer and Listing
Offering and listing details
Plan of distribution
A.
B.
C. Markets
D.
E.
F.
Selling shareholders
Dilution
Expenses of the issue
Item 10. Additional Information
Share capital
A.
B. Memorandum and articles of association
C. Material contracts
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D.
E.
F.
G.
H.
I.
Exchange controls
Taxation
Dividends and paying agents
Statement by experts
Documents on display
Subsidiary information
Item 11. Quantitative and Qualitative Disclosures About Market Risk
Item 12. Description of Securities Other than Equity Securities
A.
Debt securities
B. Warrants and rights
Other securities
C.
American depositary shares
D.
Item 13. Defaults, Dividend Arrearages and Delinquencies
Item 14. Material Modifications to the Rights of Security Holders and Use of Proceeds
PART II
A. Material modifications to instruments
B. Material modifications to rights
C. Withdrawal or substitution of assets
Change in trustees or paying agents
D.
Use of proceeds
E.
Item 15. Controls and Procedures
Disclosure controls and procedures
A.
B. Management’s annual report on internal control over financial reporting
C.
D.
Attestation report of the registered public accounting firm
Changes in internal control over financial reporting
Item 16. Reserved
Item 16A. Audit Committee Financial Expert
Item 16B. Code of Ethics
Item 16C. Principal Accountant Fees and Services
Item 16D. Exemptions from the Listing Standards for Audit Committees
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Item 16F. Change in Registrant’s Certifying Accountant
Item 16G. Corporate Governance
Item 16H. Mine Safety Disclosure
Item 16I. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Item 17. Financial Statements
Item 18. Financial Statements
Item 19. Exhibits
Index to Consolidated Financial Statements
PART III
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PRESENTATION OF FINANCIAL AND OTHER INFORMATION
Unless otherwise indicated or the context otherwise requires, all references in this annual report to "Arco” or the "Company,” "we,” "our,” "ours,” "us”
or similar terms refer to Arco Platform Limited, together with its subsidiaries.
The term "Brazil” refers to the Federative Republic of Brazil and the phrase "Brazilian government” refers to the federal government of Brazil. "Central
Bank” refers to the Brazilian Central Bank (Banco Central do Brasil). References in the annual report to "real,” "reais” or "R$” refer to the Brazilian real, the
official currency of Brazil and references to "U.S. dollar,” "U.S. dollars” or "US$” refer to U.S. dollars, the official currency of the United States.
All references to "IFRS” are to International Financial Reporting Standards, as issued by the IASB.
Financial Statements
Arco was incorporated on April 12, 2018, as a Cayman Islands exempted company with limited liability, duly registered with the Cayman Islands Registrar
of Companies. Arco became the parent company of Arco Educação S.A., or Arco Brazil, through the completion of the initial public offering and related
corporate reorganization.
We present in this annual report our audited consolidated financial statements as of December 31, 2021, and 2020 and for the years ended December 31,
2021, 2020 and 2019. Our financial statements are prepared in accordance with IFRS, as issued by the IASB.
We maintain our books and records in Brazilian reais, the presentation currency for our financial statements and also the functional currency of our
operations in Brazil. Unless otherwise noted, our financial information presented herein as of December 31, 2021, and 2020 and for the years ended December
31, 2021, 2020 and 2019 is stated in Brazilian reais, our reporting currency. The consolidated financial information contained in this annual report is derived
from our audited consolidated financial statements as of December 31, 2021, and 2020 and for the years ended December 31, 2021, 2020 and 2019, together with
the notes thereto. All references herein to "our financial statements,” "our audited consolidated financial information,” and "our audited consolidated
financial statements” are to our consolidated financial statements included elsewhere in this annual report.
This financial information should be read in conjunction with "Item 5. Operating and Financial Review and Prospects” and our consolidated financial
statements, including the notes thereto, included elsewhere in this annual report.
Our fiscal year ends on December 31. References in this annual report to a fiscal year, such as "fiscal year 2021,” relate to our fiscal year ended on
December 31 of that calendar year.
Corporate Events
We are a Cayman Islands exempted company incorporated with limited liability on April 12, 2018. On October 29, 2019, we completed a follow-on public
offering, consisting of 3,450,656 Class A common shares issued and sold by us, and 4,268,847 Class A common shares sold by certain selling shareholders.
The public offering price was US$43.00 per Class A common share. We received net proceeds of US$143.9 million, after deducting US$3.7 million in
underwriting discounts and commissions. On November 26, 2019, an additional 661,112 Class A common shares were sold by General Atlantic Arco
(Bermuda), L.P. following the exercise by the underwriters of their option to purchase additional shares.
On June 4, 2020, we completed a follow-on public offering, by which General Atlantic Arco (Bermuda), L.P. and Alfaco Holding Inc. sold an aggregate
amount of 5,563,203 Class A common shares issued by us, at a public offering price of US$47.70 per Class A common share. We did not receive any proceeds
from the sale of Class A common shares by the selling shareholders in connection with this offering.
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On September 8, 2020, we completed a follow-on public offering, consisting of 2,500,000 Class A common shares issued and sold by us. The public
offering price was US$44.80 per Class A common share. We received net proceeds of US$109.8 million, after deducting USS$2.2 million in underwriting
discounts and commissions.
On January 6, 2021, our Board of Directors approved a share repurchase program, or the Repurchase Program, to comply with management long-term
incentive plan obligations. Pursuant to the Repurchase Program, we may repurchase up to 500,000 of our outstanding Class A common shares in the open
market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on January 6, 2021, continuing until the earlier of
the completion of the repurchase or January 6, 2023, depending upon market conditions. On March 31, 2021, our Board of Directors approved the increase of
the share repurchase limit of our Repurchase Program to up to 2.5 million of our outstanding Class A common shares in the open market, based on prevailing
market prices, or in privately negotiated transactions, continuing until the earlier of the completion of the repurchase or January 6, 2023, depending upon
market conditions. As of the date of this annual report, we had purchased an aggregate of 1,818,779 Class A common shares for a total of approximately
US$43.2 million under the Repurchase Program. On November 1, 2021, we cancelled 750,000 treasury shares with the approval of our Board of Directors.
On August 1, 2020, we completed a corporate reorganization through the incorporation of Positivo Soluções Didáticas Ltda., or Positivo, and Editora Piá
Ltda. On January 1, 2021, we completed a corporate reorganization through the incorporation of Arco Ventures S.A. On July 1, 2021, we completed a corporate
reorganization through the incorporation of Barra Américas Editora Ltda., Distribuidora de Material Didático Desterro Ltda., SAS Sistema de Ensino Ltda. and
SAS Livrarias Ltda. On October 1, 2021, we completed a corporate reorganization through the incorporation of Nave à Vela Editora e Comercializadora de
Materiais Educacionais S.A. All companies were incorporated by Companhia Brasileira de Educação e Sistemas de Ensino S.A and were under our common
control and the incorporated assets and liabilities of the respective companies were recorded at their carrying amounts. The incorporations were part of a tax
planning strategy to enable us to obtain tax benefits from the amortization of fair value adjustments and goodwill resulting from business combinations.
Furthermore, we are currently implementing certain additional changes to the organizational structure of certain of our operating subsidiaries in Brazil.
This reorganization will be an internal corporate reorganization and is not expected to affect us on a consolidated basis.
On December 1, 2021, we issued US$150 million in senior notes convertible into our Class A common shares (US$100 million to Dragoneer Investment
Group LLC, or Dragoneer, and US$50 million to General Atlantic Partners (Bermuda) H, L.P., or General Atlantic), bearing interest at 8% per annum in fixed
Brazilian reais and maturing on November 15, 2028. Each note is convertible at the option of the holder into our Class A common shares at the agreed
conversion rate, which is equivalent to an initial conversion price of US$29 per share. The conversion price represents an approximately 65% premium to the
trailing 30-day volume-weighted share price at the time of signing the investment agreements for the convertible notes. Dragoneer and General Atlantic will
beneficially own approximately 5.6% and 2.8%, respectively, of our total shares (on an as converted basis for the convertible senior notes).
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Organizational Structure
The diagram below depicts our organizational structure as of the date of this annual report:
(1)
Includes Class B common shares beneficially owned by our Founding Shareholders.
(2) Arce Participações Ltda., which was incorporated in 2021, holds a minority interest of 0.1% in Arco Brasil, as required by Brazilian corporate law
requirements.
Financial Information in U.S. Dollars
Solely for the convenience of the reader, we have translated some of the real amounts included in this annual report from reais into U.S. dollars. You
should not construe these translations as representations by us that the amounts actually represent these U.S. dollar amounts or could be converted into U.S.
dollars at the rates indicated. Unless otherwise indicated, we have translated real amounts into U.S. dollars using a rate of R$5.581 to US$1.00, the commercial
selling rate for U.S. dollars as of December 31, 2021, as reported by the Central Bank. See "Item 5. Operating and Financial Review and Prospects—A.
Operating results—Exchange Rates” for more detailed information regarding translation of reais into U.S. dollars and for historical exchange rates for the
Brazilian real.
Special Note Regarding Non-GAAP Financial Measures
This annual report presents our Adjusted EBITDA, Adjusted Net Income and Free Cash Flow information for the convenience of investors. Adjusted
EBITDA, Adjusted Net Income and Free Cash Flow are the key performance indicators used by us to measure financial operating performance. Our
management believes that these Non-GAAP financial measures provide useful information to
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investors and shareholders. We also use these measures internally to establish budgets and operational goals to manage and monitor our business, evaluate
our underlying historical performance and business strategies and to report our results to the board of directors.
We calculate Adjusted EBITDA as profit (loss) for the year plus/minus income taxes plus/minus finance result plus depreciation and amortization
plus/minus share of (profit) loss of equity-accounted investees plus share-based compensation plan, restricted stock units and related payroll taxes (restricted
stock units), plus M&A expenses, plus non-recurring expenses, which are related to consulting expenses for Sarbanes-Oxley implementation, plus effects
related to COVID-19 pandemic, which includes the revision of the Company’s estimated credit losses from its trade receivables based on expected increases in
financial default and in unemployment rates in Brazil for the year.
We calculate Adjusted Net Income as profit (loss) for the year plus share-based compensation plan, restricted stock units and related payroll taxes
(restricted stock units) plus amortization of intangible assets from business combinations (which refers to the amortization of the following intangible assets
from business combinations: (i) rights on contracts, (ii) customer relationships, (iii) educational system, (iv) trademarks, (v) non-compete agreement and (vi)
software resulting from acquisitions), plus/minus changes in fair value of derivative instruments (which refers to (i) changes in fair value of derivative
instruments—finance income, plus (ii) changes in fair value of derivative instruments—finance costs), plus/minus changes in accounts payable to selling
shareholders (which refers to changes in fair value of contingent consideration and accounts payable to selling shareholders—finance costs), plus interest
income (expenses), net (which refers to interest expenses related to accounts payable to selling shareholders from business combinations adjusted by fair
value), plus/minus changes in current and deferred tax recognized in statements of income applied to all adjustments to net income (which refers to tax effects
of changes in deferred tax assets and liabilities recognized in profit or loss corresponding to financial instruments from acquisition of interests, tax benefit from
tax deductible goodwill, share-based compensation and amortization of intangible assets), plus M&A expenses (which refers to non-recurring expenses
related to the acquisitions of the year), plus non-recurring expenses, which are related to legal services (mainly due to International School arbitration) and
consulting expenses for Sarbanes-Oxley implementation, plus effects related to COVID-19 pandemic, which includes the revision of the Company’s estimated
credit losses from its trade receivables based on expected increases in financial default and in unemployment rates in Brazil for the year.
For purposes of the calculation of Adjusted Net Income for the year ended December 31, 2021, we have excluded the following adjustments that we
applied to the calculation of Adjusted Net Income for prior periods: (i) Foreign exchange effects on cash and cash equivalents; (ii) share of loss of equity-
accounted investees and (iii) Interest income (expenses) linked to a fixed rate (we will maintain the adjustment for Interest income (expenses) that refers to
adjustments by fair value). These adjustments will not be applied to the calculation of Adjusted Net Income going forward. We believe that eliminating these
adjustments from our calculation of Adjusted Net Income for the year ended December 31, 2021 and going forward does not impact our investors’ ability to
assess our results of operations. We have not retroactively restated Net Adjusted Income for the periods prior to 2021.
We calculate Free Cash Flow as net cash flows from operating activities less acquisition of property and equipment less acquisition of intangible assets.
We consider Free Cash Flow to be liquidity measures that provides useful information to management and investors about the amount of cash generated by
operating activities and cash used for investments in property and equipment required to maintain and grow our business.
We understand that, although Adjusted EBITDA, Adjusted Net Income and Free Cash Flow are used by investors and securities analysts in their
evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of
our results of operations as reported under IFRS. Additionally, our calculations of Adjusted EBITDA, Adjusted Net Income and Free Cash Flow may be
different from the calculations used by other companies, including our competitors in the education services industry, and therefore, our measures may not be
comparable to those of other companies.
For a reconciliation of our non-GAAP measures, see "Item 5. Operating and Financial Review and Prospects—A. Operating results—Reconciliations for
Non-GAAP Financial Measures.”
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Special Note Regarding ACV Bookings
This annual report presents our Annual Contract Value bookings, or ACV Bookings, for the convenience of investors. ACV Bookings represents our
customers’ commitments to pay for our solutions offerings. We believe it is a meaningful indicator of demand for our platform and the market’s response to it.
We believe ACV Bookings is a helpful metric because it is designed to show amounts that we expect to be recognized as revenue for the 12-month period
between October of one fiscal year through September of the following fiscal year. For our B2B2C Core Curriculum and Supplemental Content Solutions,
which currently represent most of our results, we deliver our educational materials to our partner schools for their convenience in the last calendar quarter of
each year, so that our partner schools can prepare their classes in advance prior to the start of the following school year in January. As a result, our results of
operations for the last quarter of a given fiscal year contain revenues relating to the following school year, which reflects the content that has been delivered
prior to the start of the new fiscal year. Therefore, ACV Bookings conveys information that has predictive value for subsequent months, and which may not
be as clearly conveyed or understood by simply analyzing our revenues in our income (loss), especially in view of our recent growth.
We define ACV Bookings as the revenue we would contractually expect to recognize in each school year pursuant to the terms of our contracts,
assuming no further additions or reductions in the number of students that will access our content in such school year. ACV Booking is a non-accounting
managerial operating metric and is not prepared in accordance with IFRS. We calculate ACV Bookings by multiplying the number of students that will access
our content by the average ticket per student per year; the related number of students and average ticket per student per year are each calculated in
accordance with the terms of each contract. For our B2B2C Core Curriculum and Supplemental Content Solutions, although our contracts with our partner
schools are typically for three-year terms, we record one year of revenue under such contracts as ACV Bookings. For example, if a school signs a three-year
contract with us to provide our Core Curriculum solution to 100 students for a contractual fee of $100 per student per year, we record $10,000 as ACV
Bookings, not $30,000.
For our B2B2C Core Curriculum and Supplemental Content Solutions, we measure our ACV Bookings monthly throughout the school year, starting in
November of the preceding fiscal year. Pursuant to the terms of our contracts with our partner schools, they are required, by the end of November of each
year, to provide us with an estimate of the number of enrolled students that will access our content in the next school year. Since we allow our partner schools
to make small adjustments to their estimates to account for late admissions and early dropouts, this number may fluctuate slightly until March 31, when it
becomes more accurate. Accordingly, we believe this metric is most accurately reflected as of March 31 of each year, and in this annual report, we refer to our
ACV Bookings as of March 31 in each year as our ACV Bookings.
Notwithstanding the above, following March 31 in a calendar year, our partner schools may experience additional admissions and/or dropouts up to
September 30 of such year, which explains the difference between the ACV Bookings and the revenue recognized for such school year. In years prior to the
COVID-19 pandemic, the difference between our ACV Bookings and the revenue recognized for the school year was not material, demonstrating the
predictability of our business. However, during 2020 and 2021 and as result of the impacts of the COVID-19 pandemic, our partner schools experienced
atypical dropout rates from March 31 to September 30, and the difference between our ACV Bookings and the revenue recognized for each school year was -
4% and -9%, respectively. The dynamics mentioned above also impacted the number of enrolled students in our partner schools.
We understand that, although ACV Bookings may be used by investors and securities analysts in their evaluation of companies, it has limitations as an
analytical tool, and you should not consider it in isolation or as a substitute for analysis of our results of operations as reported under IFRS.
Market Share and Other Information
This annual report contains data related to economic conditions in the market in which we operate. The information contained in this annual report
concerning economic conditions is based on publicly available information from third-party sources that we believe to be reasonable. Market data and certain
industry forecast data used in this annual report were obtained from internal reports and studies, where appropriate, as well as estimates, market research,
publicly available information (including information available from the United States Securities and Exchange Commission website) and industry publications.
We obtained the information included in this annual report relating to the industry in which we operate, as well as the estimates concerning market shares,
through internal
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research, public information and publications on the industry prepared by official public sources, such as the Central Bank, the Brazilian Institute of
Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, the Brazilian Education Ministry (Ministério da Educação), or MEC, the
National High School Exam (Exame Nacional do Ensino Médio), or ENEM, the National Index for Basic Education (Índice de Desenvolvimento da Educação
Básica), or IDEB, the Brazilian National Institute for Educational Studies and Research (Instituto Nacional de Estudos e Pesquisas Educacionais Anísio
Teixeira), or INEP, as well as private sources, such as EducaInsight a research company in the Brazilian education industry, and Getulio Vargas Foundation
(Fundação Getúlio Vargas), or FGV, among others.
Industry publications, governmental publications, and other market sources, including those referred to above, generally state that the information they
include has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Except as
disclosed in this annual report, none of the publications, reports or other published industry sources referred to in this annual report were commissioned by
us or prepared at our request. Except as disclosed in this annual report, we have not sought or obtained the consent of any of these sources to include such
market data in this annual report.
Rounding
We have made rounding adjustments to some of the figures included in this annual report. Accordingly, numerical figures shown as totals in some tables
may not be an arithmetic aggregation of the figures that preceded them.
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FORWARD-LOOKING STATEMENTS
This annual report on Form 20-F contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in
this annual report can be identified by the use of forward-looking words such as "anticipate,” "believe,” "could,” "expect,” "should,” "plan,” "intend,” "may,”
"predict,” "continue,” "estimate” and "potential,” among others.
Forward-looking statements appear in a number of places in this annual report and include, but are not limited to, statements regarding our intent, belief or
current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our
management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-
looking statements due to various factors, including, but not limited to, those identified under the section entitled "Risk Factors” in this annual report. These
risks and uncertainties include factors relating to:
● general economic, financial, political, demographic and business conditions in Brazil, as well as any other countries we may serve in the future and
their impact on our business, including any impact from the COVID-19 pandemic;
● fluctuations in interest, inflation and exchange rates in Brazil and any other countries we may serve in the future;
● our ability to implement our business strategy;
● our ability to integrate and realize the anticipated benefits and synergies from mergers and acquisitions;
● our ability to adapt to technological changes in the educational sector;
● our ability to enhance our brands;
● our ability to obtain government authorizations on terms and conditions and within periods acceptable to us;
● our ability to continue attracting and retaining partner schools;
● our ability to maintain the academic quality of our programs;
● the availability of qualified personnel and the ability to retain such personnel;
● changes in the financial condition of the students enrolling in our partner schools or private schools in general and in the competitive conditions in
the education industry, or changes in the financial condition of our partner schools in the primary and secondary education sector;
● our capitalization and level of indebtedness;
● the interests of our controlling shareholder;
● changes in government regulations applicable to the primary and secondary education industry in Brazil;
● government interventions in the primary or secondary education industry that affect the economic or tax regime, the collection of tuition fees or the
regulatory framework applicable to primary and/or secondary educational institutions;
● a decline in the number of our partner schools or the amount of fees we can charge for our educational platform;
● our ability to compete and conduct our business in the future and adapt to changes in circumstances;
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● the success of our marketing initiatives, including advertising and promotional efforts;
● our ability to develop new educational products, services and concepts;
● changes in consumer demands and preferences and technological advances, and our ability to innovate to respond to such changes;
● changes in labor, distribution and other operating costs;
● our compliance with, and changes to, government laws, regulations and tax matters that currently apply to us;
● other factors that may affect our financial condition, liquidity and results of operations; and
● other risk factors discussed under "Item 3. Key Information—D. Risk factors.”
Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information
or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of
unanticipated events.
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ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
A. Directors and Senior Management
PART I
Not applicable.
B. Advisers
Not applicable.
C. Auditors
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
A. Offer Statistics
Not applicable.
B. Method and Expected Timetable
Not applicable.
ITEM 3. KEY INFORMATION
A. [Removed and Reserved]
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and Use of Proceeds
Not applicable.
D. Risk Factors
Summary of Risk Factors
An investment in our Class A common shares is subject to a number of risks, including risks relating to our business and industry, risks relating to Brazil
and risks relating to our Class A common shares. The following list summarizes some, but not all, of these risks. Please read the information in the section
entitled "Risk Factors” for a more thorough description of these and other risks.
Certain Risks Relating to Our Business and Industry
● Our operations and results may be negatively impacted by the coronavirus (COVID-19) outbreak. 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 conducting classes on a flex model, with classroom and virtual classes.
Notwithstanding the above, the Company did not suspend its
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activities and, even with the return allowed by the authorities, its workforce continues to work remotely from home and gradually returning to
working on site in accordance with health and safety protocols and social distancing guidelines. 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.
● We face significant competition in each program we offer and each geographic region in which we operate. If we experience increasing
consolidation in the K-12 school industry in Brazil or if we fail to compete efficiently, we may lose market share and our profitability may be adversely
affected. We compete directly with private education platform providers and indirectly with certain traditional educational content providers. Our
competitors may begin to offer educational solutions similar to or better than those offered by us, have access to more funds, be more prestigious or
well-regarded within the academic community, or charge lower fees. If we are unable to maintain our competitive position or otherwise respond to
competitive pressures effectively, we may lose our market share, our profits may decrease, and we may be adversely affected.
● We may not be able to update, improve or offer the content of our existing educational platform on a cost-effective basis. Our educational
platform is designed to offer a complete suite of turnkey curriculum solutions intended to prepare the primary and secondary education students at
our partner schools to sit the ENEM (which is equivalent to the Gaokao in China and loosely comparable to the SAT in the United States), for entry
into post-secondary educational institutions and which is also used by the MEC and the market to evaluate Brazilian public and private schools. If
we do not adequately modify our educational platform in response to market demand, whether due to financial restrictions, technological changes or
otherwise, our ability to attract new schools and retain partner schools may be impaired and we may be materially adversely affected.
● Our business depends on the continued success of our brands, and if we fail to maintain and enhance the recognition of our brands, we may face
difficulty increasing our network of partner schools, and our reputation and operating results may be harmed. We believe that market awareness
of our brands, SAS Plataforma de Educação, or SAS, SAE Digital, International School, Sistema Positivo de Ensino, or SPE, Sistema COC, among
others, has contributed significantly to the success of our business. If our marketing initiatives are not successful or become less effective, if we are
unable to further enhance our brand recognition, or if we incur excessive marketing and promotion expenses, or if our brand image is negatively
impacted by any negative publicity, we may not be able to attract new partner schools successfully or efficiently, and our business and results of
operations may be materially and adversely affected. In addition, if any partner school using our educational platforms engages in unlawful activities
or uses our educational platforms in an unauthorized manner, the general public may associate such school’s behavior with our brand, generating
negative publicity that may adversely affect our reputation.
● If we continue to grow, we may not be able to appropriately manage the expansion of our business and staff, the increased complexity of our
software and platforms, or grow in our addressable market. We are currently experiencing a period of significant expansion and may face, as a
result, certain expansion-related issues, such as cash flow management, corporate culture, IT integration and internal controls, among others. These
issues and the significant amount of time spent on addressing them may result in the diversion of our management’s attention from other business
issues and opportunities. We cannot assure you that our current and planned platform and systems, procedures and controls, personnel and third-
party relationships will be adequate to support our future operations. In addition, our continuous expansion places a significant strain on
management and on our operational and financial resources, which strain is expected to continue. Our failure to manage growth effectively could
seriously harm our business, results of operations and financial condition.
● An increase in delays and/or defaults in the payment of amounts owed to us by partner schools may adversely affect our income and cash flow.
Because the historical information included elsewhere in this annual report may not be representative of our results as a consolidated company,
investors may have limited financial information on which to evaluate us, their investment decision, and our prior performance.
● An increase in delays and/or defaults in the payment of tuition fees may adversely affect our income and cash flows. We depend on the full and
timely payment of the amounts owed to us by partner schools. Our partner schools may face financial
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difficulties, and in certain cases, insolvency, or bankruptcy. An increase in payment delinquency or default by partner schools may have a material
adverse effect on our cash flows and our business, including our ability to meet our obligations, and in certain circumstances, we may decide to
terminate our contracts with such partner schools, increasing our attrition rates.
Certain Factors Relating to Brazil
● The Brazilian federal government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement
as well as Brazil’s political, regulatory, legal and economic conditions could harm us and the price of our Class A common shares. The Brazilian
government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases or decreases in
interest rates, changes in fiscal policies, wage and price controls, foreign exchange rate controls, blocking access to bank accounts, currency
devaluations, capital controls and import and export restrictions. Uncertainty over whether the Brazilian federal government will implement reforms or
changes in policy or regulation affecting these or other factors in the future may affect economic performance and contribute to economic
uncertainty in Brazil, which may have an adverse effect on our activities and consequently our operating results and may also adversely affect the
trading price of our Class A common shares.
● Economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares. Political crises have affected
and continue to affect the confidence of investors and the general public which have historically resulted in economic deceleration and heightened
volatility in the securities offered by companies with significant operations in Brazil.
● Inflation and certain measures by the Brazilian government to curb inflation have historically harmed the Brazilian economy and Brazilian
capital markets, and high levels of inflation in the future would harm our business and the price of our Class A common shares. Inflation, policies
adopted to curb inflationary pressures and uncertainties regarding possible future governmental intervention have contributed to economic
uncertainty and heightened volatility in the Brazilian capital markets.
● Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our Class A common shares. The Brazilian
government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini-
devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a
floating exchange rate system. Depending on the circumstances, either devaluation or appreciation of the real relative to the U.S. dollar and other
foreign currencies could restrict the growth of the Brazilian economy, as well as our business, results of operations and profitability.
● Infrastructure and workforce deficiency in Brazil may impact economic growth and have a material adverse effect on us. Growth is limited by
inadequate infrastructure, including potential energy shortages and deficient transportation, logistics and telecommunication sectors, general strikes,
the lack of a qualified labor force, and the lack of private and public investments in these areas, which limit productivity and efficiency.
● Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may harm the
Brazilian economy and the price of our Class A common shares. The market for securities offered by companies with significant operations in Brazil
is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin American and emerging markets,
as well as the United States, Europe, and other countries. To the extent the conditions of the global markets or economy deteriorate, the business of
companies with significant operations in Brazil may be harmed.
Certain Factors Relating to Our Class A Common Shares
● The Founding Shareholders, our largest group of shareholders, own 100% of our outstanding Class B common shares, which represents 90.3%
of the voting power of our issued share capital, and will control all matters requiring shareholder approval. This concentration of ownership and
voting power limits your ability to influence corporate matters. As long as the Founding Shareholders continue to beneficially own a sufficient
number of Class B common shares, even if they beneficially
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own significantly less than 50% of our outstanding share capital, acting together, they will be able to effectively control our decisions. However, if
our Class B common shares at any time represent less than 10% of the total number of shares in the capital of the Company outstanding, the Class B
common shares then outstanding will automatically convert into Class A common shares.
● Our Articles of Association contain anti-takeover provisions that may discourage a third-party from acquiring us and adversely affect the rights
of holders of our Class A common shares. Our Articles of Association contain certain provisions that could limit the ability of others to acquire our
control, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred
shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series.
● If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our
Class A common shares and our trading volume could decline. The trading market for our Class A common shares depends in part on the research
and reports that securities or industry analysts publish about us or our business. If one or more of the analysts who cover us downgrade our Class
A common shares or publish inaccurate or unfavorable research about our business, the price of our Class A common shares would likely decline.
● We do not anticipate paying any cash dividends in the foreseeable future. We currently intend to retain our future earnings, if any, for the
foreseeable future, to fund the operation of our business and future growth. We do not intend to pay any dividends to holders of our Class A
common shares. As a result, capital appreciation in the price of our Class A common shares, if any, will be your only source of gain on an investment
in our Class A common shares.
● Our dual class capital structure means our shares are not included in certain indices. We cannot predict the impact this may have on our share
price. Under the announced policies, our dual class capital structure is not eligible for inclusion in any of the FTSE Russell, S&P Dow Jones and
MSCI indices and, as a result, mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track these indices will
not invest in our stock. It continues to be unclear what effect, if any, these policies will have on the valuations of publicly traded companies excluded
from the indices, but in certain situations they may depress these valuations compared to those of other similar companies that are included.
Exclusion from indices could make our Class A common shares less attractive to investors and, as a result, the market price of our Class A common
shares could be adversely affected.
● The dual class structure of our common stock has the effect of concentrating voting control with the Founding Shareholders; this will limit or
preclude your ability to influence corporate matters. Due to the ten-to-one voting ratio between our Class B and Class A common shares, the
beneficial owners of our Class B common shares (composed of the Founding Shareholders) collectively will continue to control a majority of the
combined voting power of our common shares and therefore be able to control all matters submitted to our shareholders, requiring the approval of an
ordinary resolution, so long as the total number of the issued and outstanding Class B common shares is at least 10% of the total number of shares
outstanding. The fact that future transfers by holders of Class B common shares will generally result in those shares converting to Class A common
shares, subject to limited exceptions as provided in the Articles of Association; as well as the ten-to-one voting ratio of our Class B common shares
and Class A common shares, holders of our Class B common shares will in many situations continue to maintain control of all matters requiring
shareholder approval. This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future.
Certain Factors Relating to Our Business and Industry
Our operations and results may be negatively impacted by the coronavirus (COVID-19) outbreak.
Since December 2019, a novel strain of COVID-19 has spread in over 150 countries, including China, Italy, U.S. and Brazil. On March 11, 2020, the World
Health Organization, revised the classification of COVID-19 from an epidemic (when a disease spreads through a specific community or region) to a pandemic,
which according to World Health Organization’s definition is when there is a worldwide spread of a new disease. The classification of the disease as a
pandemic was motivated by the rapid increase in the number of cases and the number of affected countries on all continents, triggering measures by
governments, companies, and societies to
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contain the advances of COVID-19. The measures vary from country to country in quantity and degree of severity but in Brazil basically involve: (1)
recommendations to adopt voluntary isolation (avoid going out on the streets, avoiding crowds, avoiding physical contact with other people, etc.); (2)
internal restrictions regarding the movement of people; (3) closing of schools; (4) closing of public places (parks and leisure centers); (5) closures of shopping
malls, bars and restaurants; (6) adoption of remote working practices (home office) by companies, whenever possible and permitted by their activities; (7)
restriction and/or suspension of trade in non-essential goods and services in the context of COVID-19 (while supermarkets, drugstores, gas stations and other
essential services remain available); (8) purchase restrictions for certain essential items to avoid scarcity; (9) interruption of production activities of consumer
items not essential to combat the pandemic; (10) restriction on the delivery of products to homes other than essentials; (11) compulsory reduction of working
hours; (12) cancellation of public events; and (13) other restrictive measures.
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, and since the COVID-19 vaccination of children between five and
eleven years old has also been initiated in Brazil, most private schools are resuming regular classroom lessons or adopting the blended learning method,
mixing onsite and virtual classes. In Brazil, educational activities are gradually being resumed, including in person classes in some cases and states with
several security rules. The return is occurring differently in each Brazilian state, according to their particular situation and local authorities’ recommendations.
Notwithstanding the above, the Company did not suspend its activities and, even with the return allowed by the authorities, its workforce continues to
work remotely from home and gradually returning to work on site in accordance with health and safety protocols and social distancing guidelines. In this
scenario, the Company has made additional investments in IT and network infrastructure; incurred additional expenses for cleaning and disinfecting the
installations; purchased alcohol and masks; funded COVID-19 tests and H1N1 flu vaccination campaigns with the objective of taking care of its employees,
reducing the demand for care in health units and to facilitate the diagnosis of COVID-19. The Company also delivered chairs, computers, and work kits to its
employees. Additionally, to support schools, since day 1, the Company has made available an integrated platform with daily live classes to all students,
webinars, broadcast, and remote support to maintain 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 related to the COVID-19 outbreak. However, due to uncertainties with respect to number of students for some of our partner schools for
the 2022 school year, additional orders of educational materials placed by partner schools after the original deadline for the 2022 school year were unusually
high, leading to non-recurring delays related to the delivery of these additional educational materials.
In January 2021, the COVID vaccine began to be applied to Brazilians. Vaccination started with the priority groups: health workers, the elderly, the
disabled and indigenous villagers. Brazil ended 2021 with 69% of its population fully vaccinated.
Despite vaccination efforts, we are facing a new wave of infections from the omicron variant of the COVID-19 virus. Throughout 2021, new variants of
COVID-19 emerged, including the omicron variant, which impacted the number of hospital admissions and led to the adoption of further restrictive measures in
some countries to contain the pandemic. Accordingly, should new variants emerge and result in further hospitalizations and medical conditions, restrictive
governmental measures may be reestablished, including the prohibition of non-essential activities and lockdowns, which may adversely affect our financial
condition and results of operations. 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
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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 debts 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.
We face significant competition in each program we offer and each geographic region in which we operate. If we experience increasing consolidation
in the K-12 school industry in Brazil or if we fail to compete efficiently, we may lose market share and our profitability may be adversely affected.
We compete directly with private education platform providers and indirectly with certain traditional educational content providers. Brazil’s antitrust
authority, the Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica), or CADE, has a consolidated decision-making
practice to the education industry. For example, in September 2021, it approved a transaction between "CBE” and "Pearson Education do Brasil”, in which it
reaffirmed the relevant market definition related to information collected from the market test. Accordingly, CADE understands that the (1) relevant market of
"educational systems” (which includes several educational services, e.g., teachers training platforms, digital and printed content and technological platforms)
is different from the (2) relevant market of "textbooks and other classroom materials” (which is referred to in this annual report as "traditional educational
content”). Nonetheless, the authority acknowledged that the providers of "textbooks and other classroom materials” compete, to a certain extent, with
"educational systems” providers. Our competitors may begin to offer educational solutions similar to or better than those offered by us, have access to more
funds, be more prestigious or well-regarded within the academic community, or charge lower fees. To compete effectively, we may be required to reduce our
fees that we charge partner schools or increase our operating expenses to retain partner schools or attract new schools or to pursue new market opportunities.
As a result, our revenues and profitability may decrease. We cannot assure you that a migration from traditional education content providers to education
platform providers will be successful in the future, or that we will be able to compete successfully against our current or future competitors. Moreover, at
present, there have been certain isolated cases of market consolidation in the private primary and secondary, or K-12, industry in Brazil. If such industry
consolidation intensifies, a trend that has been and is currently taking place in the post-secondary education industry in the country, we may face increasing
levels of competition in the markets in which we operate. If we are unable to maintain our competitive position or otherwise respond to competitive pressures
effectively, we may lose our market share, our profits may decrease, and we may be adversely affected.
We may not be able to update, improve or offer the content of our existing educational platform on a cost-effective basis.
Our educational platform is designed to offer a complete suite of turnkey curriculum solutions intended to prepare the primary and secondary education
students at our partner schools to sit the ENEM (which is equivalent to the Gaokao in China and loosely comparable to the SAT in the United States), for
entry into post-secondary educational institutions and which is also used by the MEC and the market to evaluate Brazilian public and private schools. To
differentiate ourselves and remain competitive, we must continually update our content and develop new educational solutions, including through the
adoption of new technological tools to deliver our content. Updates to our current content and the development of new educational solutions may not be
readily accepted by our partner schools, their students or by the market. Also, we may not be able to introduce new educational solutions at the same pace as
our competitors or at the pace required by the market or by certain regulatory measures that establishes guidelines to educational content in Brazil, such as
National Education Guidelines Law (Lei de Diretrizes e Bases da Educação Nacional), or LDB, the National Common Core Curriculum (Base Nacional
Comum Curricular), or BNCC, or the National Curriculum Guidelines (Diretrizes Nacionais Curriculares), or DCN. If we do not adequately modify our
educational platform in response to market demand, whether due to financial restrictions, technological changes or otherwise, our ability to attract new
schools and retain partner schools may be impaired and we may be materially adversely affected.
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Our business depends on the continued success of our brands, and if we fail to maintain and enhance the recognition of our brands, we may face
difficulty increasing our network of partner schools, and our reputation and operating results may be harmed.
We believe that market awareness of our brands, SAS, SAE Digital, International School, SPE, Sistema COC, among others, has contributed significantly
to the success of our business. Maintaining and enhancing our brands is critical to our efforts to increase our network of partner schools, which is in turn
critical to our business. We rely heavily on the efforts of our sales force and our marketing channels, including online advertising, search engine marketing,
social media, and word-of-mouth. Failure to maintain and enhance the recognition of our brands could have a material and adverse effect on our business,
operating results, and financial condition. We have devoted significant resources to our brand promotion efforts and the training of our sales force in recent
years, but we cannot assure you that these efforts will be successful. Our ability to attract new partner schools depends not only on investment in our brand,
our marketing efforts and the success of our sales force, but also on the perceived value of our services versus competing alternatives among our client base.
In addition, a failure by our clients to distinguish between our brands and the different content that they provide may result in a reduction in sales volume and
revenue, margins, or market share of one of our brands at the expense of the others. If our marketing initiatives are not successful or become less effective, if
we are unable to further enhance our brand recognition, or if we incur excessive marketing and promotion expenses, or if our brand image is negatively
impacted by any negative publicity, we may not be able to attract new partner schools successfully or efficiently, and our business and results of operations
may be materially and adversely affected.
In addition, if any partner school using our educational platforms engages in unlawful activities or uses our educational platforms in an unauthorized
manner, the general public may associate such school’s behavior with our brand, generating negative publicity that may adversely affect our reputation.
If we continue to grow, we may not be able to appropriately manage the expansion of our business and staff, the increased complexity of our software
and platforms, or grow in our addressable market.
We are currently experiencing a period of significant expansion and may face, as a result, certain expansion-related issues, such as cash flow
management, corporate culture, IT integration and internal controls, among others. These issues and the significant amount of time spent on addressing them
may result in the diversion of our management’s attention from other business issues and opportunities. In addition, we believe that our corporate culture and
values are critical to our success, and we have invested a significant amount of time and resources building them. If we fail to preserve our corporate culture
and values, our ability to recruit, retain and develop personnel and to effectively implement our strategic plans may be harmed.
We must constantly update our software and platform, enhance and improve our billing and transaction and other business systems, and add and train
new software designers and engineers, as well as other personnel to accommodate the increased use of our platform and the new solutions and features we
regularly introduce. This process is time intensive and expensive and may lead to higher costs in the future. Furthermore, we may need to enter into
relationships with various strategic partners, other online service providers and other third parties necessary to our business. The increased complexity of
managing multiple commercial relationships could lead to execution problems that can affect current and future revenues, and operating margins.
We cannot assure you that our current and planned platform and systems, procedures and controls, personnel and third-party relationships will be
adequate to support our future operations. In addition, our continuous expansion places a significant strain on management and on our operational and
financial resources, which strain is expected to continue. Our failure to manage growth effectively could seriously harm our business, results of operations
and financial condition.
An increase in delays and/or defaults in the payment of amounts owed to us by partner schools may adversely affect our income and cash flow.
We depend on the full and timely payment of the amounts owed to us by partner schools. Our partner schools may face financial difficulties, and in
certain cases, insolvency or bankruptcy. An increase in payment delinquency or default by partner schools may have a material adverse effect on our cash
flows and our business, including our ability to meet our obligations, and in certain circumstances, we may decide to terminate our contracts with such partner
schools, increasing our attrition rates. Moreover, these risks
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may be aggravated during the COVID-19 pandemic, including due to an economic crisis resulting from the COVID-19 pandemic, which may, for example,
increase the levels of delinquency or default. Our allowance for doubtful accounts expenses as a percentage of our net revenue was 2.2%, 3.5% and 3.0% for
the years ended December 31, 2021, 2020 and 2019, respectively.
Our business is subject to seasonal fluctuations, which may cause our operating results to fluctuate from quarter-to-quarter and adversely impact our
working capital and liquidity throughout the year, negatively affecting our business, financial condition and results of operations.
Our revenues and operating results normally fluctuate as a result of seasonal variations in our business, principally due to the number of months in a
fiscal quarter that our partner schools are fully operational and serving students. Our main deliveries are shipped to partner schools in the last quarter of each
year (typically in November and December), and in the first quarter of each subsequent year (typically in February and March). Furthermore, the materials we
deliver in the fourth quarter are used by our partner schools for the following school year, and as such, our fourth quarter results reflect the growth in the
number of our students from one school year to another, leading to generally higher revenues in our fourth quarter compared to the preceding quarters in
each fiscal year. Consequently, in aggregate, the seasonality of our revenues has generally produced higher revenues in the first and fourth quarters of our
fiscal year. In addition, we bill partner schools and collect the sales we charge them in the first half of each academic collections year, generally resulting in a
higher cash position in the first half of each fiscal year relative to the second half of each fiscal year.
A significant portion of our expenses are also seasonal. Due to the nature of our business cycle, we require significant working capital, typically in
September or October of each year, to cover costs related to production and accumulation of inventory, selling and marketing expenses, and delivery of our
teaching materials at the end of each fiscal year in preparation for the beginning of each school year. Therefore, such operating expenses are generally
incurred in the period between September and December of each year.
Accordingly, we expect quarterly fluctuations in our revenues and operating results to continue. These fluctuations could result in volatility and
adversely affect our liquidity and cash flows. As our business grows, these seasonal fluctuations may become more pronounced. As a result, we believe that
sequential quarterly comparisons of our financial results may not provide an accurate assessment of our financial position.
Our working capital needs have increased and may continue to increase for the near future. We have historically relied on our cash flow generation to
satisfy our working capital needs. We expect our working capital needs to increase as our business expands. If at some point in time we do not have sufficient
working capital, we may not be able to pursue our growth strategy, respond to competitive pressures or fund key strategic initiatives, which may harm our
business, financial condition and results of operations.
The sales cycle of our business may cause our operating results to fluctuate from quarter-to-quarter and adversely impact our working capital and
liquidity from year to year, adversely affecting our business, financial condition, and results of operations.
Our platform has evolved into a complex solution. The adoption of our platform by partner schools requires us to first build a high level of trust and
confidence in our solutions, which can only be achieved by demonstrating a proven track record of success and quality, while constantly monitoring client
satisfaction and feedback.
We have a lead time (which we define as the period from the moment of first contact to the execution of a contract) for the acquisition of new partner
schools, and we typically enter into contracts with new partner schools within one year from the moment of first contact, which requires a series of
interactions and constant contact, including dedicated sessions for experimentation with our platform and testing, events aimed at target partner schools,
product journeys and guided visits to our business units, and industry fair exhibits. Accordingly, we expect quarterly fluctuations in our cash flows. These
fluctuations could result in annual volatility and adversely affect our liquidity. As our business grows or if our business stops growing and we lose clients,
these fluctuations may become more pronounced.
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We do not currently control some of our equity investments, which could adversely affect our ability to commercialize our products.
We acquire interests in third parties for the expansion, development or commercialization of our products. Currently, we have a 11.03% interest in Bewater
Ventures I GA FIP – Multiestratégia, or Bewater, a fund managed by Paraty Capital, which used the proceeds from our investment to subsequently make a
minority investment in Grupo A, a company that provides educational solutions for higher education. Additionally, we have a 25.06% interest in Inco Limited,
a company that provides financial assistance to schools as well as a 23.43% interest in Tera Treinamentos Profissionais S.A., a company that offers tech-
related educational services, such as UX design, full stack development and data analytics, among others, for the B2B and B2C markets. We do not currently
have a controlling interest in these companies and any disagreements or disputes with these or other companies where we have a minority interest could
adversely affect our ability to develop and commercialize our products and in turn, our financial condition, and results of operations. The failure to continue
any investment arrangement or to resolve disagreements with current or future companies where we have a minority interest could materially and adversely
affect our ability to transact the business that is the subject of such investment arrangement, which would in turn negatively affect our financial condition and
results of operations.
We may pursue strategic acquisitions or investments. The failure of an acquisition or investment to produce the anticipated results, or the inability to
integrate an acquired company fully, could harm our business.
We are currently evaluating possible acquisition opportunities, and we may from time to time submit non-binding proposals or acquire or invest in
complementary companies or businesses, as part of our strategy to expand our operations, including through acquisitions or investments that may be material
in size and/or of strategic relevance. The success of an acquisition or investment will depend on our ability to make accurate assumptions regarding the
valuation, operations, growth potential, integration and other factors related to that business. We cannot assure you that our acquisitions or investments will
produce the results that we expect at the time we enter, or complete, a given transaction. Furthermore, acquisitions may result in difficulties integrating the
acquired companies, and may result in the diversion of our capital and our management’s attention from other business issues and opportunities. We may not
be able to successfully integrate the operations that we acquire, including their personnel, financial systems, distribution or operating procedures. If we fail to
integrate acquisitions successfully, our business could suffer. In addition, the expense of integrating any acquired business and their results of operations
may harm our operating results.
In order to conduct certain acquisitions, investments or divestments, we may also require pre-merger control approvals from the Brazilian Administrative
Council for Economic Defense (Conselho Administrativo de Defesa Econômica), or CADE, or other regulatory authorities.
We may require additional funds to continue our expansion strategy. If we are unable to obtain adequate financing to complete any potential acquisition
and implement our expansion plans, our growth strategy may be adversely affected.
For further information about our acquisitions and investments, see "Item 4.A. History and development of the company—Acquisitions and
Investments.”
If we lose key personnel our business, financial condition and results of operations may be adversely affected.
We are dependent upon the ability and experience of a number of our key personnel who have substantial experience with our operations. Many of our
key personnel have worked for us for a significant amount of time or were recruited by us specifically due to their industry experience. It is possible that the
loss of the services of one or a combination of our senior executives, certain members of our board of directors or key managers, including Ari de Sá
Cavalcante Neto, our chief executive officer, director and founder, and Oto Brasil de Sá Cavalcante, our chairman, could have a material adverse effect on our
business, financial condition, and results of operations. We currently do not carry any key man insurance.
The ability to attract, recruit, retain and develop qualified employees is critical to our success and growth.
In order for us to successfully compete and grow and increase the number of partner schools, we must attract, recruit, retain and develop the necessary
personnel who can provide the required expertise across the entire spectrum of our high-quality educational
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content needs, including with respect to sales and marketing. While a number of our key personnel have substantial experience with our operations, we must
also develop succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for
qualified personnel is competitive, and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart
with qualified or effective successors. We must continue to hire additional personnel to execute our strategic plans. Our effort to retain and develop personnel
may also result in significant additional expenses, which could adversely affect our profitability. We cannot assure that qualified employees will continue to
be employed or that we will be able to attract and retain qualified personnel in the future. In particular, we may not achieve anticipated revenue growth from
expanding our sales and marketing teams if we are unable to attract, develop and retain qualified sales and marketing personnel in the future.
Failure to retain or attract key personnel could have a material adverse effect on our business, financial condition and results of operations.
Any increase in the attrition rates of students in our partner schools may adversely affect our results of operations.
We believe that the attrition rates at our partner schools are primarily related to the personal motivation and financial situation of their current and
potential students, as well as to socioeconomic conditions in Brazil. Significant changes in projected student attrition rates and/or failure to re-enroll may
affect the enrollment numbers of our partner schools, as well as their ability to recruit and enroll new students, each of which may have a material adverse
effect on our projected revenues and our results of operations.
We may face restrictions and penalties under the Brazilian Consumer Protection Code and the Brazilian Antitrust Law in the future.
Brazil has a series of strict consumer protection laws, referred to collectively as the Consumer Protection Code (Código de Defesa do Consumidor). These
laws apply to all companies in Brazil that supply products or services to Brazilian consumers. They include protection against misleading and deceptive
advertising, protection against coercive or unfair business practices and protection in the formation and interpretation of contracts, usually in the form of civil
liabilities and administrative penalties for violations. Although we are a business-to-business-to-consumer, or B2B2C, business, some consumers may allege
that we are directly liable for any problems in our solution and try to assess us based upon the Consumer Protection Code.
These penalties are often levied by the Brazilian Consumer Protection Agencies (Fundação de Proteção e Defesa do Consumidor, or PROCONs), which
oversee consumer issues on a district-by-district basis. Companies that operate across Brazil may face penalties from multiple PROCONs, as well as from the
National Secretariat for Consumers (Secretaria Nacional do Consumidor, or SENACON). Companies may settle claims made by consumers via PROCONs by
paying compensation for violations directly to consumers and through a mechanism that allows them to adjust their conduct, called a conduct adjustment
agreement (Termo de Ajustamento de Conduta, or TAC).
Brazilian public prosecutors may also commence investigations of alleged violations of consumer rights and require companies to enter into TACs.
Companies that violate TACs face potential enforcement proceedings and other potential penalties such as fines, as set forth in the relevant TAC. Brazilian
public prosecutors may also file public civil actions against companies who violate consumer rights or competition rules, seeking strict adherence to the
consumer protection laws and compensation for any damages to consumers.
As a company operating in Brazil, we are also subject to Brazilian antitrust laws and regulations, which establishes penalties for practices that are deemed
violations of the economic order. In certain cases, we may be investigated or sanctioned by the CADE, to the extent our business practices are deemed to (i)
limit, restrain or in any way harm free competition or free initiative; (ii) control the relevant market of goods or services; (iii) arbitrarily increase profits, and (iv)
abusively exercise a dominant position.
Our success depends on our ability to monitor and adapt to technological changes in the education sector and maintain a technological infrastructure
that works adequately and without interruption.
Information technology is an essential factor of our growth given that we deliver content through an integrated online educational platform. Our
information technology systems and tools may become obsolete or insufficient, or we may have difficulties in following
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and adapting to technological changes in the education sector. Moreover, our competitors may introduce better products or platforms. Our success depends
on our ability to efficiently improve our platform while developing and introducing new features that are accepted by schools (including our partner schools)
and their students.
Additionally, a failure to upgrade our technology, features, content, security infrastructure, network infrastructure, or other infrastructure associated with
our platform could harm our business. Adverse consequences could include unanticipated disruptions, slower response times, bugs, degradation in levels of
customer support, impaired quality of users’ experiences of our educational platform and delays in reporting accurate financial information.
In addition, we face risks associated with unauthorized access to our systems, including by hackers and due to failures of our electronic security
measures. These unauthorized entries into our systems can result in the theft of proprietary or sensitive information or cause interruptions in the operation of
our systems. As a result, we may be forced to incur considerable expenses to protect our systems from electronic security breaches and to mitigate our
exposure to technological problems and interruptions.
Our business depends on our information technology infrastructure functioning properly and without interruptions. Several problems regarding our
information technology structure, such as viruses, hackers, system interruptions and other technical difficulties may have a material adverse effect on us and
our business.
Regarding the aforementioned risks we implemented some of the best security practices currently used in the market. We used the NIST Cyber Security
framework that provides practices, controls and technologies that enable our company to recover, identify, protect, detect, and respond to cybernetic risks.
Some of the best practices that we have today are: (i) assets controls and monitoring; (ii) malware infection risk monitoring; (iii) we developed an access
model, and we can manage this access with automatized tools; (iv) event monitoring of our main technologies using a SIEM solution. This solution permits
that we correlate events and identify possible threats or security incidents; (v) implemented a scheduled routine with infrastructure intrusion tests; (vi)
monthly vulnerability analysis in our systems and fixes if required; (vii) created awareness programs for our employees; (viii) we are currently implementing
other recommendations to increase our maturity level, some of them are: (a) implement security in our internal network infrastructure; (b) implement a risk
management process and (c) build a disaster recovery plan to all critical environments.
We derive the majority of our revenues from the contract fees per student that we generate from the sales of our educational content to our partner
schools. Any disruption in our relationship with our partner schools may materially adversely affect us.
Our network of partner schools to which we make available our B2B2C Core Curriculum and Supplemental Content Solutions comprises 8,056 partner
schools as of March 31, 2022. Our net revenue was R$1,232.1 million and R$1,001.7 million for the years ended December 31, 2021, and 2020. We typically enter
into contracts with our partner schools for one-year terms for our Supplemental solutions and three to five-year terms for our Core solutions, which
contemplate penalties ranging between 20% and 100% of the remaining total value of the contract in the event of termination. In addition, we also rely in part
on existing partner school referrals to attract new partner schools. Accordingly, maintaining a good relationship with our schools, developing new
relationships and expanding our network of partner schools are essential to the success of our business. We may also not be able to renew our contracts with
our partner schools, including because of new leadership in our partner schools deciding to discontinue the use or expansion of our educational platform in
their curriculum. Any deterioration in our relationship with our partner schools, and any early termination of, or a failure to renew, our contracts with our
partner schools may harm our image, impair our ability to pursue our growth strategy, and materially adversely affect our business, our operating and financial
results and our cash flows.
To support our growth and to help us retain our clients, we have a dedicated sales support team that provides pedagogical assistance to partner schools
and helps them train students and teachers to fully engage with the features of our platform, in order to maximize their results from using our solutions. Our
pedagogical support team also makes visits and performs field work for these purposes, building rapport and strengthening our ties with our partner schools.
If we fail to provide efficient and effective customer support, or to maintain our customer support standards as our business grows, our ability to maintain and
grow our operations may be harmed and we may need to hire additional support personnel, which could harm our results of operations.
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Increases in the price of certain inputs used to produce our printed educational materials and increases in the fees of our third-party printer providers
may materially affect us.
Increases in the price of the inputs used for editing and publishing the materials related to our Core Curriculum and Supplemental Content Solutions
particularly the price of paper, the cost of printing services and publishing, as well as increases in the fees of our third-party printer providers, which produce
our printed educational materials, could adversely affect our results, if we are not able to fully pass these cost increases onto our partner schools.
Paper and postage prices are difficult to predict and control. Paper is a commodity, and its price may be impacted by fluctuations in foreign exchange rates
and commodities prices and can be subject to significant volatility. Our third-party printer providers have adjusted their fees to account for changes in
prevailing market prices of their inputs, especially paper. Though we have historically been able to realize favorable pricing through volume discounts,
particularly as a result of our significant recent growth, no assurance can be provided that we will be able to continue to realize favorable printing and
publishing pricing. We cannot predict with certainty the magnitude of future price changes for paper, postage, and printing and publishing in general. Further,
we may not be able to pass such increases on to our partner schools.
We may not be able to pass on increases in our costs by adjusting the contract fees we charge our partner schools.
Our primary source of income is the payments we receive from our partner schools in connection with the contract fees per student that we charge them
to use our Core Curriculum and Supplemental Content Solutions. For the year ended December 31, 2021, operation, sales, and corporate personnel expenses
represented 30.9% and third-party services expenses represented 7.0% of our total costs and expenses for the period. Personnel costs are adjusted
periodically using indices that reflect changes in inflation levels. Personnel costs are also adjusted annually because of customary annual employee salary
adjustments in line with inflation. If we are not able to transfer any increases in our costs to partner schools by increasing the contract fees per student that
we charge them, our operating results may be adversely affected.
Any changes in tax law, tax reforms or review of the tax treatment of our activities, including the loss or reduction in tax benefits on the sale of books
(including digital content) may materially adversely affect us.
We currently benefit from tax Law No. 10,865/04, as amended by Law No. 11,033/04, which establishes a zero-rate for the social integration program tax
(Programa de Integração Social, or PIS) and the social contribution on revenues tax (Contribuição para o Financiamento da Seguridade Social, or
COFINS) on the sale of books. The sale of the books is also exempt by the Brazilian constitution from the Brazilian municipal services tax (Imposto Sobre
Serviços, or ISS) and from the Brazilian tax on the circulation of goods, interstate and intercity transportation and communication services (Imposto sobre
Operações relativas à Circulação de Mercadorias e sobre Prestações de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação, or
ICMS). If the Brazilian government or any Brazilian state, municipality or tax authority decides to change, revoke or review the current tax treatment of our
activities, or cancel or reduce the tax benefit applied on the sale of goods, including digital books and e-readers, and/or challenge it, and we are unable to pass
any cost increase onto our partner schools, our results may be materially adversely affected.
As of the date of this annual report, there are several bills relating to tax reforms that are under review by the Brazilian Congress. The proposed tax
reforms involve a comprehensive overhaul of the consumer tax system. One bill proposes to (i) extinguish three federal taxes, the federal tax on manufactured
products (Imposto sobre Produtos Industrializados, or IPI), PIS and COFINS; (ii) create and apply ICMS at the state level and ISS at the municipal level; and
(iii) create a new tax on transactions for goods and services (Imposto sobre Operações com Bens e Serviços, or IBS). Another bill proposes to create a social
contribution tax on transactions for goods and services (Contribuição Social sobre Operações com Bens e Serviços, or CBS) at a 12% rate, which would
substitute PIS and COFINS and revoke our zero-rate tax benefits for PIS and COFINS on the sale of books. Additional bills may be proposed in the context of
such wide-ranging tax reforms. Moreover, there are recent discussions concerning the potential imposition of new taxes, including new taxes on compulsory
loans, taxes on large fortunes and a contribution on financial transactions, as well as discussions to repeal the income tax exemption applicable to the
distribution of dividends.
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The extent to which the tax reform will impact our financial results and operations will depend on future developments, which are still uncertain and
cannot be predicted due to the early stage of the process. Based on future developments of the tax reform, it is possible that we may, in the future, be required
to take actions or steps in relation to our business that could have a disruptive or a material and adverse effect on our business. A tax reform or any change in
the laws and regulations that affect the taxes or tax incentives applicable to us may directly or indirectly adversely impact our business and results of
operations.
If we are unable to maintain consistent educational quality throughout our partner schools’ network, including the education materials we provide to
our partner schools, we may be adversely affected.
The quality of our academic curricula is a key element of the quality of the Core Curriculum and Supplemental Content Solutions we provide. We cannot
assure that we will be able to develop academic curricula for our Core Curriculum and Supplemental Content Solutions with the same levels of excellence as
existing curricula and meeting the requirements of the LDB, BNCC and DCN, to which we are currently subject, or meeting the requirements of our partner
schools. Deficiencies in the quality of academic curricula for our educational platform and changes in the requirements of the LDB, BNCC and DCN may have
a material adverse effect on our business. To this date, we have implemented the mandatory requirements, but some modifications must be implemented in the
following years to comply with LDB, BNCC and DCN requirements.
In addition, our partner schools and their students are regularly evaluated and graded by the State and Municipal Education Secretaries and MEC. If our
partner schools’ campuses, programs or students receive lower scores from the MEC than in previous years in any of their evaluations, including the IDEB
and the ENEM, or if there is a decline in our partner schools students’ acceptance rates at prestigious higher education institutions post-secondary schools,
we may be adversely affected by perceptions of decreased educational quality of our educational platform, which may negatively affect our reputation and,
consequently, our results of operations and financial condition.
We may become subject to various laws and regulations applicable to educational platform providers, and failure to meet such future laws and
regulations could harm our business.
Currently, we may follow the requirements of the LDB, BNCC and DCN to elaborate our educational content, and we are not regulated by the MEC nor are
we subject to any government regulations that are imposed by National Education Board (Conselho Nacional de Educação), or the CNE, or by the Primary
and Secondary Education Board (Câmara de Educação Básica), or CEB. Should we become subject to the supervision and regulation of the MEC or any
other authority or any government laws and regulations imposed by the CNE or the CEB or any other authority, we may be required to meet certain legal and
regulatory requirements that may be imposed on our operations, including, but not limited to, MEC accreditation or re-accreditation requirements for our
educational platform, which may adversely affect us. We may be adversely affected by changes in the laws and regulations applicable to educational platform
providers, particularly by changes that impose accreditation and re-accreditation requirements on educational platforms and impose certain academic
requirements for educational platform courses and curricula. In addition, we may be materially adversely affected if we are unable to obtain these
authorizations and accreditations in a timely manner or if we cannot introduce new features to our educational platform as quickly as our competitors.
The quality of the pedagogical content we deliver to our clients is significantly dependent upon the quality of our editors, publishers and purchased
content.
The educational materials we provide are a combination of content developed by our internal production team and content purchased from certain
publishers in our market. Our editorial team is responsible for producing our materials, working in conjunction with our EdTech team to implement additional
features and technology delivery. Our content production process requires significant coordination among different teams as well as qualified personnel with
appropriate skill sets to ensure the quality of our pedagogical content is maintained. We may not be able to retain, recruit or train qualified employees or
obtain pedagogical content that meets our standards. Delays in the delivery of content purchased from authors may have a severe impact on our annual
content creation schedule. Additionally, a shortage of qualified editors, employees, publishers or suitable purchased content or a decrease in the quality of
produced or purchased content, whether actual or perceived, or a significant increase in the cost to engage or retain qualified personnel or acquire content,
would have a material adverse effect on our business, financial condition, and results of operations.
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We utilize third-party logistics service providers for the shipping of all our collections of printed teaching materials. The successful delivery of our
materials to our clients depends upon effective execution by our logistics team and such service providers. Any material failure to execute properly for
any reason, including damage or disruption to any service providers’ facilities, would have an adverse effect on our business, financial condition, and
results of operations.
The delivery of printed books to schools is a seasonal activity, with a cycle beginning with the creation and revision of content generally from April to
July, the purchase of printing services from August to October, and delivery from November to January. We have expanded our operations rapidly since our
inception. As our size increases, so does the size and complexity of our logistics operation.
There is a high volume of deliveries in November and December, requiring significant involvement in inventory/demand management and relationship and
planning alongside the printers. In an industry where one of the most valued indicators by the schools is the timely delivery of printed materials, failure to
meet deadlines, inadequate logistical planning, disruptions in distribution centers, deficient inventory management, and failure to meet client requirements
may damage our reputation, increase returns of our materials or cause inventory losses and negatively impact our gross margins, results of operations and
business.
Our inventory for our printed teaching materials is substantially located in warehouse facilities leased and operated by us and then delivered by a third-
party shipping company that handles shipping of all physical learning materials. If our logistics service providers fail to meet their obligations to deliver
teaching materials to partner schools in a timely manner, or if a material number of such deliveries are incomplete or contain assembly errors, our business and
results of operations could be adversely affected. Furthermore, a natural disaster, fire, power interruption, work stoppage or other unanticipated catastrophic
event, especially during the period from August through October when we are awaiting receipt of most of the curriculum materials for the school year and
have not yet shipped such materials to partner schools, could significantly disrupt our ability to deliver our products and operate our business. If any of our
material inventory items, warehouse facilities or distribution centers were to experience any significant damage, we would be unable to meet our contractual
obligations and our business would suffer.
Failure to protect or enforce our intellectual property and other proprietary rights could adversely affect our business and financial condition and
results of operations.
We rely and expect to continue to rely on a combination of trademark, copyright, patent and trade secret protection laws, as well as confidentiality and
license agreements with our employees, consultants and third parties with whom we have relationships to protect our intellectual property and proprietary
rights.
As of December 31, 2021, we relied on trademark, patent, copyright, and other intellectual property laws to establish and protect its products and services
and owns several intellectual property assets in Brazil and abroad, including 774 trademarks registrations in Brazil (573 of which have been granted and 201 of
which are under review but that we are entitled to use), 1 industrial design registration in process, and 8 software registrations. In relation to international
assets, we have 12 trademarks registrations: 2 in Argentina, 2 in Bolivia, 1 in Chile, 1 in Ecuador, 3 in Paraguay, 2 in Uruguay, and 2 in Venezuela.
Our intellectual property rights in Brazil extend to 115 registered domain names and content that do not require certification or registration in order to be
protected. In addition, we own several registered copyrights, most notably copyrights for text, images, edition, reformulation and book updates, among others.
Any dismissal of our trademarks’ applications may impact our business. Third parties may challenge any patents, copyrights, trademarks and other
intellectual property and proprietary rights owned or held by us. Third parties may knowingly or unknowingly infringe, misappropriate, or otherwise violate
our patents, copyrights, trademarks and other proprietary rights and we may not be able to prevent infringement, misappropriation, or other violation without
substantial expense to us.
Furthermore, we cannot guarantee that:
● our intellectual property and proprietary rights will provide competitive advantages to us;
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● our competitors or others will not design around our intellectual property or proprietary rights;
● our ability to assert our intellectual property or proprietary rights against potential competitors or to settle current or future disputes will not be
limited by our agreements with third parties;
● our intellectual property and proprietary rights will be enforced in jurisdictions where competition may be intense or where legal protection may be
weak;
● any of the patents, trademarks, copyrights, trade secrets or other intellectual property or proprietary rights that we presently employ in our business
will not lapse or be invalidated, circumvented, challenged or abandoned; or
● we will not lose the ability to assert our intellectual property or proprietary rights against or to license our intellectual property or proprietary rights to
others and collect royalties or other payments.
If we pursue litigation to assert our intellectual property or proprietary rights, an adverse decision in any of these legal actions could limit our ability to
assert our intellectual property or proprietary rights, limit the value of our intellectual property or proprietary rights or otherwise negatively impact our
business, financial condition and results of operations. If the protection of our intellectual property and proprietary rights is inadequate to prevent use or
misappropriation by third parties, the value of our brand and other intangible assets may be diminished, competitors may be able to mimic our service and
methods of operations more effectively, the perception of our business and service to customers and potential customers may become confused in the
marketplace and our ability to attract customers may be adversely affected.
We may in the future be subject to intellectual property claims, which are costly to defend and could harm our business, financial condition, and
operating results.
Because of the large number of authors that participate in our publications, from time to time, third parties may allege in the future that we or our business
infringes, misappropriates, or otherwise violates their intellectual property or proprietary rights, including with respect to our publications. Many companies,
including various "non-practicing entities” or "patent trolls,” are devoting significant resources to developing or acquiring patents that could potentially
affect many aspects of our business. There are numerous patents that broadly claim means and methods of conducting business on the internet. We have not
exhaustively searched patents related to our technology. In addition, the publishing industry has been, and we expect in the future will continue to be, the
target of counterfeiting and piracy. We may implement measures to protect against these potential liabilities that could require us to spend substantial
resources. Any costs incurred because of liability or asserted liability relating to sales of unauthorized or counterfeit educational materials could harm our
business, reputation and financial condition.
Third parties may initiate litigation against us without warning. Others may send us letters or other communications that make allegations without
initiating litigation. We have in the past and may in the future receive such communications, which we assess on a case-by-case basis. We may elect not to
respond to the communication if we believe it is without merit or we may attempt to resolve disputes out-of-court by electing to pay royalties or other fees for
licenses. If we are forced to defend ourselves against intellectual property claims, whether they are with or without merit or are determined in our favor, we
may face costly litigation, diversion of technical and management personnel, inability to use our current website or inability to market our service or
merchandise our products. As a result of a dispute, we may have to develop non-infringing technology, including partially or fully revise any publication that
infringes intellectual property rights, enter into licensing agreements, adjust our merchandising or marketing activities or take other action to resolve the
claims. These actions, if required, may be unavailable on terms acceptable to us or may be costly or unavailable. If we are unable to obtain sufficient rights or
develop non-infringing intellectual property or otherwise alter our business practices, as appropriate, on a timely basis, our reputation or brand, our business
and our competitive position may be affected adversely, and we may be subject to an injunction or be required to pay or incur substantial damages and/or
fees and/or royalties.
Certain of our services are provided using proprietary software and our software is mainly developed by our employees, who specifically assign to us
their copyrights over the software in their employment agreements. Additionally, the applicable law establishes that employers shall have full title over rights
relating to software developed by their employees. Nonetheless, we could be subject to lawsuits by former employees claiming ownership of proprietary
software that were not specifically assigned to us in their
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respective employment agreements. As a result, we may be required to obtain licenses of such software, incurring costs relating to payments of royalties
and/or damages and we may be forced to cease the use of such software. If we are unable to use certain of our proprietary software, this could have a material
adverse effect on our business, financial condition and results of operations.
In addition, we use open-source software in connection with certain of our products and services. Companies that incorporate open-source software into
their products have, from time to time, faced claims challenging the ownership of open-source software and/or compliance with open-source license terms. As
a result, we could be subject to suits by parties claiming ownership of what we believe to be open-source software or noncompliance with open-source
licensing terms. Some open-source software licenses require users who distribute or use open-source software as part of their software to publicly disclose all
or part of the source code to such software and/or make available any derivative works of the open-source code on unfavorable terms or at no cost. Any
requirement to disclose our proprietary source code or pay damages for breach of contract could have a material adverse effect on our business, financial
condition, and results of operations.
We may be subject to risks related to non-compliance with the Brazilian Data Protection Law and may be adversely affected by the application of
penalties, including pecuniary sanctions. Additionally, failure to comply with data privacy regulations could result in reputational damage to our
brands an adversely affect our business, financial and condition and results of operations.
On August 14, 2018, Law No. 13,709 of August 14, 2018, was enacted, as amended, or the Brazilian Personal Data Protection Law ("LGPD”), which came
fully into effect in September 2020 and brought major changes to the personal data protection system in Brazil.
The LGPD establishes a new legal framework to be observed by individuals and legal entities, detailing rules for the collection, production, reception,
classification, use, access, reproduction, transmission, distribution, processing, filing, storage, elimination, evaluation or information control, modification,
communication, transfer, dissemination, or extraction of personal data and provides, among others, for the rights of data subjects, the legal bases applicable to
the processing of personal data, the requirements for obtaining consent and others obligations and penalties. The National Data Protection Authority (ANPD)
is the body of the federal public administration responsible for ensuring the protection of personal data and for implementing and monitoring compliance with
the LGPD in Brazil.
If we do not comply with the LGPD, we could be subject to one, or a combination of, administrative sanctions applicable by the National Data Protection
Authority, which came into force on August 1, 2021. Sanctions include (1) warnings, with the imposition of a deadline for the adoption of corrective measures;
(2) fines, up to a maximum amount of 2% of company’s or group’s turnover in Brazil limited to R$50.0 million per violation; (3) disclosure of the violation; (4)
the restriction of access to or deletion of the personal data to which the violation relates; (5) in case of repetition of the violation, temporary suspension of the
database or of data processing activities, partial or complete prohibition of processing activities.
Additionally, any perceived or actual unauthorized disclosure of personally identifiable information, whether through breach of our network by an
unauthorized party, employee theft, misuse, or error or otherwise, could harm our reputation, impair our ability to attract and retain our customers, or subject
us to claims or litigation arising from damages suffered by individuals.
Failure to protect the personal data processed by us, as well as failure to comply with the applicable legislation, may result in high fines, disclosure of the
incident to the market, cancellation of existing contracts, temporary block and/or deletion of the personal data from our database, without eliminating the
possibility of civil and criminal sanctions, which may adversely affect our reputation, financial condition and results of operations. In addition, we could incur
significant costs in complying with relevant laws and regulations regarding the unauthorized disclosure of personal information, which may be affected by
any changes to data privacy legislation at both the federal and state levels. See "Item 4. Information on The Company—B. Business Overview—Regulatory
Overview—Data Protection.”
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Cybersecurity incidents, including attacks on the infrastructure necessary to maintain our IT systems, may result in financial losses and damage to our
reputation.
Cybersecurity incidents may result in the misappropriation of our information and/or customer information or in ineffective time on its servers or
operations, which may affect us materially and adversely. Any losses of intellectual property, trade secrets or other sensitive business information or the
interruption of its operations could adversely affect our financial results. Due to such risks, we have improved the monitoring of our infrastructure and
systems and seeking to implement the best practices regarding the development of IT systems.
We are susceptible to illegal or improper uses of our educational platform, which could expose us to additional liability and harm our business.
Our educational platform is susceptible to unauthorized use, copyright violations and unauthorized copying and distribution (whether by students,
schools or otherwise), theft, employee fraud, and other similar breaches and violations. These occurrences may potentially harm our business and
consequently negatively impact our results of operations. Additionally, we may be required to employ a significant amount of resources to combat such
occurrences and identify those responsible.
Unfavorable decisions in our legal, arbitration or administrative proceedings may adversely affect us.
We are, and may be in the future, party to legal, arbitration and administrative investigations, inspections and proceedings arising in the ordinary course
of our business or from extraordinary corporate, tax or regulatory events, involving our controlling shareholders, subsidiaries, controlled or affiliated entities,
suppliers, commercial practices, students, faculty members, as well as environmental, competition, government agencies and tax authorities, particularly with
respect to civil, tax, antitrust and labor claims. We cannot guarantee that the results of these proceedings will be favorable to us or that we have made
sufficient provisions for liabilities that may arise because of these or other proceedings. Even if we adequately address issues raised by any inspection
conducted by an agency or successfully defend our case in an administrative proceeding or court action, we may have to set aside significant financial and
management resources to settle issues raised by such proceedings or to those lawsuits or claims.
Therefore, failures in our governance, risk management and compliance programs and other internal policies, as well as adverse decisions in material legal,
arbitrational or administrative proceedings related to the applicable laws and other legal provisions, in Brazil or overseas, even if such proceedings are without
merit, may adversely affect our reputation, businesses, financial conditions, results of operations and the price of our Class A common shares, and may
subject our administrators to criminal penalties.
We depend on dividend distributions by our subsidiaries, and we may be adversely affected if the performance of our subsidiaries is not positive or if
Brazil imposes legal restrictions on dividend distributions by subsidiaries.
We control several subsidiary companies in Brazil that carry out our business activities. Our ability to comply with our financial obligations and to pay
future dividends, if any, to our shareholders depends on our ability to receive distributions from the companies we control, which in turn depends on the cash
flow and profits of those companies. There is no guarantee that the cash flow and profits of our controlled companies will be sufficient for us to comply with
our financial obligations and pay future dividends or interest on shareholders’ equity, if any, to our shareholders, or that the Brazilian federal government will
not impose legal restrictions or tax payments on dividend distributions by our subsidiaries.
We and our subsidiaries may be held directly or indirectly responsible for labor claims resulting from the actions of third parties, including
independent contractors and service providers.
To meet the needs of our partner schools and offer greater comfort and quality in all areas and aspects of our activities, we depend on service providers
and suppliers for a variety of services. We may be adversely affected if these third-party service providers and suppliers do not meet their obligations under
Brazilian labor laws. According to Brazilian law we may be liable to the employees of these service providers and suppliers for labor obligations of these
service providers and suppliers and may also be fined by the relevant authorities. If we are held liable for such claims, we may be adversely affected.
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We operate in markets that are dependent on Information Technology, or IT, systems, and technological change. Failure to maintain and support
customer facing services, systems, and platforms, including addressing quality issues and execution on time of new products and enhancements, could
negatively impact our revenues and reputation.
We use complex IT systems and products to support our businesses activities, including customer-facing systems, back-office processing, and
infrastructure. We face several technological risks associated with online product service delivery, information technology security (including virus and
cyber-attacks), e-commerce and Enterprise Resource Planning, or ERP, system upgrades. Our plans and procedures to reduce risks of attacks on our system
by unauthorized parties may not be successful. Thus, our businesses could be adversely affected if our systems and infrastructure experience a failure or
interruption in the event of future attacks on our system by unauthorized parties.
We rely upon a third-party data center service provider to host certain aspects of our platform and content and any disruption to, or interference with,
our use of such services, could impair our ability to deliver our platform, resulting in customer dissatisfaction, damaging our reputation, and harming
our business.
We utilize data center hosting facilities from a global third-party service provider to make certain content available in our platform. Our operations depend,
in part, on our provider’s ability to protect its facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal
acts and similar events. The occurrence of spikes in user volume, traffic, natural disasters, acts of terrorism, vandalism or sabotage, or a decision to close a
facility without adequate notice, or other unanticipated problems at our provider’s facilities could result in lengthy interruptions in the availability of our
platform, which would adversely affect our business.
Failure to prevent or detect a malicious cyber-attack on our systems and databases could result in a misappropriation of confidential information or
access to highly sensitive information.
Cyber-attacks are becoming more sophisticated and pervasive. Across our business we hold large volumes of personally identifiable information
including that of employees, schools, customers, students and parents and legal guardians. Individuals may try to gain unauthorized access to our data to
misappropriate such information for potentially fraudulent purposes, and our security measures may fail to prevent such unauthorized access. A breach could
result in a devastating impact on our reputation, financial condition, or student experience, as well as sanctions provided for by the LGPD. In addition, if we
were unable to prove that our systems are properly designed to detect an intrusion, we could be subject to severe penalties and loss of existing or future
business. We have been monitoring our systems and made several security tests to identify our potential weakness in advance and implement the applicable
security measures.
A material weakness in our internal control over financial reporting may be identified, and if we fail to establish and maintain proper and effective
internal controls over financial reporting, our results of operations and our ability to operate our business may be harmed.
In connection with the audit of our consolidated financial statements, we and our independent registered public accounting firm may identify material
weaknesses, which is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable
possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. Our
management has assessed the effectiveness of our internal control over financial reporting and has concluded that the Company maintained effective internal
controls as of December 31, 2021. Management’s assessment of and conclusion on the effectiveness of internal controls over financial reporting did not
include the internal controls of Me Salva! Cursos e Consultorias S.A. ("Me Salva!”), Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A.
("Eduqo”), Desenvoolva – Educação, Treinamento e Consultoria Corporativa Ltda. ("Edupass”) and P2D Educação Ltda. ("P2D”), which are included in the
2021 consolidated financial statements of the Company. Collectively, Me Salva!, Eduqo, Edupass and P2D constituted less than 3% of the Company’s total
assets as of December 31, 2021 and less than 5% of the Company’s total revenues for the year ended December 31, 2021.
We are subject to the Sarbanes-Oxley Act, which requires, among other things, that we establish and maintain effective internal controls over financial
reporting and disclosure controls and procedures. Testing of our internal controls may reveal deficiencies that
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are deemed to be material weaknesses or significant deficiencies and render our internal controls over financial reporting ineffective. If we are not able to
comply with these requirements in a timely manner, or if we or our management identifies material weaknesses or significant deficiencies in our internal
controls over financial reporting that are deemed to be material weaknesses, the market price of our Class A common shares may decline and we may be
subject to investigations or sanctions by the SEC, the Financial Industry Regulatory Authority, Inc., or FINRA, or other regulatory authorities.
The effectiveness of internal controls over financial reporting as of December 31, 2021, was audited by Ernst & Young Auditores Independentes S.S., or
EY, the independent registered public accounting firm that also audited our consolidated financial statements as of and for the year then ended. EY has issued
an unqualified report on our internal control over financial reporting, which is included elsewhere in this annual report. EY’s audit of the internal control over
financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of Me Salva!, Eduqo, Edupass and P2D.
Certain Factors Relating to Brazil
The Brazilian federal government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement as well
as Brazil’s political, regulatory, legal and economic conditions could harm us and the price of our Class A common shares.
The Brazilian federal government frequently exercises significant influence over the Brazilian economy and occasionally makes significant changes in
policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures,
increases or decreases in interest rates, changes in fiscal policies, wage and price controls, foreign exchange rate controls, blocking access to bank accounts,
currency devaluations, capital controls and import and export restrictions. We have no control over and cannot predict what measures or policies the Brazilian
government may take in the future, and how these can impact us and our business. We and the market price of our securities may be harmed by changes in
Brazilian government policies, as well as general economic factors, including, without limitation:
● growth or downturn of the Brazilian economy;
● interest rates and monetary policies;
● exchange rates and currency fluctuations;
● inflation;
● liquidity of the domestic capital and lending markets;
● import and export controls;
● exchange controls and restrictions on remittances abroad and payments of dividends;
● modifications to laws and regulations according to political, social and economic interests;
● fiscal policy and changes in tax laws and related interpretations by tax authorities;
● economic, political and social instability, including general strikes and mass demonstrations;
● the regulatory framework governing the educational industry;
● labor and social security regulations;
● energy and water shortages and rationing;
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● commodity prices, including prices of paper and ink;
● public health, including as a result of epidemics and pandemics, such as the COVID-19 pandemic;
● changes in demographics, in particular declining birth rates, which will result in a decrease in the number of enrolled students in primary and
secondary education in the future; and
● other political, diplomatic, social and economic developments in or affecting Brazil.
Uncertainty over whether the Brazilian federal government will implement reforms or changes in policy or regulation affecting these or other factors in the
future may affect economic performance and contribute to economic uncertainty in Brazil, which may have an adverse effect on our activities and
consequently our results of operations, and may also adversely affect the trading price of our Class A common shares. In addition, the outcome of the
upcoming Brazilian presidential elections that are taking place in October 2022 could result in an increase in government interference in the economy,
aggravated by the impacts of the COVID-19 pandemic, which could negatively impact us and our results of operations.
Further, Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. The recent
economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. See
"—The ongoing economic uncertainty and political instability in Brazil, including as a result of ongoing corruption investigations, may harm us and the price
of our Class A common shares.”
As has been true in the past, the current political and economic environment in Brazil has and is continuing to affect the confidence of investors and the
general public, which has historically resulted in economic deceleration and heightened volatility in the securities offered by companies with significant
operations in Brazil, which may adversely affect us and our Class A common shares.
See "Management’s Discussion and Analysis of Financial Condition and Results of Operations—Macroeconomic environment” for further information.
The ongoing economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares.
Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have
affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened
volatility in the securities offered by companies with significant operations in Brazil.
The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political
environment. In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Brazilian Federal
Prosecutor’s Office, including the largest such investigation, known as "Operação Lava Jato,” have negatively impacted the Brazilian economy and political
environment. The potential outcome of these investigations is uncertain, but they have already had an adverse impact on the image and reputation of the
implicated companies, and on the general market perception of the Brazilian economy. In March 2021, a Brazilian Federal Supreme Court ruling issued by
Justice Edson Fachin annulled the decisions that had convicted former President Luiz Inacio Lula da Silva. As a result of this ruling, former President Luiz
Inacio Lula da Silva recovered his political rights and can run for office in the upcoming 2022 presidential elections in Brazil, which may result in political
instability and may have an adverse effect on Brazilian capital markets.
On April 14, 2021, a Parliamentary Committee of Inquiry (Comissão Parlamentar de Inquérito), or "CPI,” was established to investigate actions and
omissions by the Brazilian federal government in facing the pandemic and collapse of health in the State of Amazonas at the beginning of the year and the
misuse of funds to combat the effects of COVID-19 in Brazil. With the support and expedition of a precautionary measure by the Brazilian Supreme Court
justice, Luís Roberto Barroso, the necessary measures were taken for the creation and installation of the CPI. The CPI investigated, among other things,
alleged failures to impose lockdowns or promote social distancing, the successive removals of health ministers to manage the pandemic, and the promotion of
unproven drugs in treating COVID-19. Upon completion of the congressional investigation, a final report was approved on October 26, 2021,
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recommending that President Bolsonaro be indicted for nine crimes related to his handling of the COVID-19 pandemic, including crimes against humanity. The
congressional report could lead to criminal charges or trigger an impeachment proceeding.
As of the date of this annual report, several impeachment proceedings have been filed against the current President. Moreover, concerns regarding any
potential interventionist stances in the future may have direct or indirect impacts on the market. Any resulting consequences of these investigations could
have material adverse effects on the political and economic environment in Brazil, as well as on businesses operating in Brazil, including ours. The potential
outcome of these and other investigations is uncertain, but they have already had a negative impact on the general perception of the market on the Brazilian
economy and have affected and may continue to adversely affect our business, our financial condition and our operating results, as well as the trading price
of our Class A common shares. We cannot predict whether the ongoing investigations will result in further political and economic instability, or if new
allegations against government officials and/or executives of private companies will arise in the future or will result in additional investigations.
A failure by the Brazilian government to implement necessary reforms may result in diminished confidence in the Brazilian government’s budgetary
condition and fiscal stance, which could result in downgrades of Brazil’s sovereign foreign credit rating by credit rating agencies, negatively impact Brazil’s
economy, and lead to further depreciation of the real and an increase in inflation and interest rates, which could adversely affect our business, financial
condition and results of operations.
Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business and the
price of our Class A common shares.
Inflation and certain measures by the Brazilian government to curb inflation have historically harmed the Brazilian economy and Brazilian capital
markets, and high levels of inflation in the future would harm our business and the price of our Class A common shares.
In the past, Brazil has experienced extremely high rates of inflation. Inflation and some of the measures taken by the Brazilian government to curb inflation
have had significant negative effects on the Brazilian economy generally. Inflation, policies adopted to curb inflationary pressures and uncertainties regarding
possible future governmental intervention have contributed to economic uncertainty and heightened volatility in the Brazilian capital markets.
According to the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or IPCA, which is published by the IBGE, Brazilian
inflation rates were 10.1%, 4.5% and 4.3% in 2021, 2020 and 2019, respectively. Brazil may experience high levels of inflation in the future and inflationary
pressures may lead to the Brazilian government’s intervening in the economy and introducing policies that could harm our business and the price of our Class
A common shares. In the past, the Brazilian government’s interventions included the maintenance of a restrictive monetary policy with high interest rates that
restricted credit availability and reduced economic growth, causing volatility in interest rates. For example, the official interest rate in Brazil oscillated from
7.00% as of December 31, 2017, to 2.00% as of December 31, 2020, as established by the Monetary Policy Committee (Comitê de Política Monetária do Banco
Central do Brasil), or COPOM. Beginning in March 2021, COPOM began increasing Brazil’s official interest rate, reaching 9.25% as of December 31, 2021. As
of the date of this annual report, Brazil’s official interest rate was 11.75%. Conversely, more lenient government and Central Bank policies and interest rate
decreases have triggered and may continue to trigger increases in inflation, and, consequently, growth volatility and the need for sudden and significant
interest rate increases, which could negatively affect us and increase our indebtedness.
Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our Class A common shares.
The Brazilian currency has been historically volatile and has been devalued frequently over the past three decades. Throughout this period, the Brazilian
government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini-devaluations
(during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate
system. Although long-term depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter periods
of time has resulted in significant variations in the exchange rate between the real, the U.S. dollar and other currencies. The real/U.S. dollar exchange rate
reported by the Central Bank was R$4.031 per U.S.$1.00 on December 31, 2019, which reflected a 4.0% depreciation in the real against the U.S. dollar during
2019. The real/U.S. dollar exchange rate reported by the Central Bank was R$5.197 per U.S.$1.00 on
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December 31, 2020, which reflected a 28.9% depreciation in the real against the U.S. dollar during 2020. The real/U.S. dollar exchange rate reported by the
Central Bank was R$5.581 per U.S.$1.00 on December 31, 2021, which reflected a 7.4% depreciation in the real against the U.S. dollar during 2021. There can be
no assurance that the real will not again depreciate against the U.S. dollar or other currencies in the future.
A devaluation of the real relative to the U.S. dollar could create inflationary pressures in Brazil and cause the Brazilian government to, among other
measures, increase interest rates. Any depreciation of the real may generally restrict access to the international capital markets. It would also reduce the U.S.
dollar value of our results of operations. Restrictive macroeconomic policies could reduce the stability of the Brazilian economy and harm our results of
operations and profitability. In addition, domestic and international reactions to restrictive economic policies could have a negative impact on the Brazilian
economy. These policies and any reactions to them may harm us by curtailing access to foreign financial markets and prompting further government
intervention. A devaluation of the real relative to the U.S. dollar may also, as in the context of the current economic slowdown, decrease consumer spending,
increase deflationary pressures, and reduce economic growth.
On the other hand, an appreciation of the real relative to the U.S. dollar and other foreign currencies may deteriorate the Brazilian foreign exchange
current accounts. We and certain of our suppliers purchase goods and services from countries outside Brazil, and thus changes in the value of the U.S. dollar
compared to other currencies may affect the costs of goods and services that we purchase. Depending on the circumstances, either devaluation or
appreciation of the real relative to the U.S. dollar and other foreign currencies could restrict the growth of the Brazilian economy, as well as our business,
results of operations and profitability.
Infrastructure and workforce deficiency in Brazil may impact economic growth and have a material adverse effect on us.
Our performance depends on the overall health and growth of the Brazilian economy. Brazilian GDP performance has fluctuated over the past few years,
with a growth of 1.4% in 2019, a contraction of 4.1% in 2020, and a growth of 4.6% in 2021. Growth has been structurally limited by inadequate infrastructure,
including potential energy shortages and deficient transportation, logistics and telecommunication sectors, general strikes, the lack of a qualified labor force,
and the lack of private and public investments in these areas, which limit productivity and efficiency. Any of these factors could lead to labor market volatility
and generally impact income, purchasing power and consumption levels, which could limit growth and ultimately have a material adverse effect on us.
Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may harm the Brazilian
economy and the price of our Class A common shares.
The market for securities offered by companies with significant operations in Brazil is influenced by economic and market conditions in Brazil and, to
varying degrees, market conditions in other Latin American and emerging markets, as well as the United States, Europe and other countries. To the extent the
conditions of the global markets or economy deteriorate, the business of companies with significant operations in Brazil may be harmed. The weakness in the
global economy has been marked by, among other adverse factors, lower levels of consumer and corporate confidence, decreased business investment and
consumer spending, increased unemployment, reduced income and asset values in many areas, reduction of China’s growth rate, currency volatility and
limited availability of credit and access to capital. Developments or economic conditions in other emerging market countries have at times significantly
affected the availability of credit to companies with significant operations in Brazil and resulted in considerable outflows of funds from Brazil, decreasing the
amount of foreign investments in Brazil.
Crises and political instability in other emerging market countries, the United States, Europe or other countries could decrease investor demand for
securities offered by companies with significant operations in Brazil, such as our Class A common shares. Investors’ sentiment in one country may cause
capital markets in other countries to fluctuate, affecting the value of our Class A common shares, even if indirectly. The economic, political, and social
instability in the United States, the trade war between the United States and China, crises in Europe and other countries, the consequences of United
Kingdom’s exit from the European Union, and global tensions, as well as economic or political crises in Latin America or other emerging markets including as a
result of the COVID-19 pandemic, may significantly affect the perception of the risks inherent in investment in Brazil.
Additionally, on November 7, 2020, Joseph Biden won the presidential election in the United States and assumed office as the 46th President of the
United States on January 20, 2021. The U.S. president has considerable influence, which may materially and
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adversely affect global economy and political stability. We cannot ensure that the Biden administration will adopt policies designed to promote
macroeconomic stability, fiscal discipline, as well as domestic and foreign investment, which may materially and adversely impact the trading price of
securities of Brazilian issuers, including our Class A common shares. Growing economic uncertainty and news of a potentially recessive economy in the
United States may also create uncertainty in the Brazilian economy.
In 2022, the military conflict between the Russian Federation and Ukraine is contributing to further increases in the prices of energy, oil and other
commodities (including grains and fertilizers) and to volatility in financial markets globally, as well as a new landscape in relation to international sanctions. It
is unclear whether these challenges and uncertainties will be contained or resolved, and what effects they may have on the global political and economic
conditions in the long term.
These developments, as well as potential crises and forms of political instability arising therefrom or any other as of yet unforeseen development, may
adversely affect the United States and global economies and capital markets, which may, in turn, materially adversely affect the trading price of our Class A
common shares.
Any further downgrading of Brazil’s credit rating could reduce the trading price of our Class A common shares.
Given the current significance of our Brazil operations to our results of operations, we may be harmed by investors’ perceptions of risks related to Brazil’s
sovereign debt credit rating. Rating agencies regularly evaluate Brazil and its sovereign credit ratings, which are based on several factors including
macroeconomic trends, fiscal and budgetary conditions, indebtedness metrics and the perspective of changes in any of these factors.
The rating agencies began to review Brazil’s sovereign credit rating in September 2015. Subsequently, the three major rating agencies downgraded
Brazil’s investment-grade status:
● In 2015, Standard & Poor’s initially downgraded Brazil’s credit rating from BBB-negative to BB-positive and subsequently downgraded it again from
BB-positive to BB, maintaining its negative outlook, citing a worse credit situation since the first downgrade. On January 11, 2018, Standard & Poor’s
further downgraded Brazil’s credit rating from BB to BB-stable, which was reaffirmed on June 2, 2021.
● In December 2015, Moody’s placed Brazil’s Baa3’s issue and bond ratings under review for downgrade and subsequently downgraded the issue and
bond ratings to below investment grade, at Ba2 with a negative outlook, citing the prospect of a further deterioration in Brazil’s debt indicators,
taking into account the low growth environment and the challenging political scenario. On May 25, 2021, Moody’s maintained Brazil’s credit rating at
Ba2-stable.
● In 2016, Fitch downgraded Brazil’s sovereign credit rating to BB-positive with a negative outlook, citing the rapid expansion of the country’s budget
deficit and the worse-than-expected recession. In February 2018, Fitch downgraded Brazil’s sovereign credit rating again to BB-negative, citing,
among other factors, fiscal deficits, the increasing burden of public debt and an inability to implement reforms that would structurally improve Brazil’s
public finances. On May 27, 2021, Fitch reaffirmed Brazil’s credit rating at BB-negative.
Brazil’s sovereign credit rating is currently rated below investment grade by the three main credit rating agencies. Consequently, the prices of securities
offered by companies with significant operations in Brazil have been negatively affected.
The full consequences of a credit rating downgrade are inherently uncertain, as they depend upon numerous dynamic, complex, and inter-related factors
and assumptions, including market conditions at the time of any downgrade. A prolongation or worsening of the current Brazilian recession and continued
political uncertainty, among other factors, could lead to further ratings downgrades. We cannot assure you that the rating agencies will maintain their current
ratings or outlooks, and such changes could increase our funding costs and adversely affect our results of operations. Any further downgrade of Brazil’s
sovereign credit ratings could heighten investors’ perception of risk and, as a result, cause the trading price of our Class A common shares to decline.
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Certain Factors Relating to Our Class A Common Shares
The Founding Shareholders, our largest group of shareholders, own 100% of our outstanding Class B common shares, which represents 90.3% of the
voting power of our issued share capital, and will control all matters requiring shareholder approval. This concentration of ownership and voting
power limits your ability to influence corporate matters.
As of December 31, 2021, Oto Brasil de Sá Cavalcante, Margarida Maria Porto Soares de Sá Cavalcante, Ari de Sá Cavalcante Neto, Mariana Magalhães
de Sá Cavalcante, Patrícia Soares de Sá Cavalcante, Paula Soares de Sá Cavalcante and Luciana Soares de Sá Cavalcante Moraes, or the Founding
Shareholders, control our company and do not hold any of our Class A common shares (except for Ari de Sá Cavalcante Neto, who held as of December 31,
2021, 1.3% of the Class A common shares), but beneficially own 48.2% of our issued share capital through their beneficial ownership of all of our outstanding
Class B common shares, and consequently, 90.3% of the combined voting power of our issued share capital. Our Class B common shares are entitled to 10
votes per share and our Class A common shares, which are publicly traded, are entitled to one vote per share. Our 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. As a result,
the Founding Shareholders will control the outcome of all decisions at our shareholders’ meetings and will be able to elect a majority of the members of our
board of directors. In addition, so long as they are appointed and are serving as our directors, they will also be able to influence and direct our actions in areas
such as business strategy, financing, distributions, acquisitions and dispositions of assets or businesses. For example, the Founding Shareholders, in their
capacity as directors, may cause us to make acquisitions that increase the amount of our indebtedness or outstanding Class A common shares, sell revenue-
generating assets or inhibit change of control transactions that benefit other shareholders. The Founding Shareholders’ decisions on these matters may be
contrary to your expectations or preferences, and they may take actions that could be contrary to your interests. They can prevent any other shareholders,
including you, from blocking these actions. For further information regarding shareholdings in our company, see "Item 7. Major Shareholders and Related
Party Transactions—A. Major shareholders.”
As long as the Founding Shareholders continue to beneficially own a sufficient number of Class B common shares, even if they beneficially own
significantly less than 50% of our outstanding share capital, acting together, they will be able to effectively control our decisions. For example, if our Class B
common shares amounted to 15% of our outstanding common shares, beneficial owners of our Class B common shares (consisting of the Founding
Shareholders), would collectively control 63.8% of the voting power of our outstanding common shares. If the Founding Shareholders sell or transfer any of
their Class B common shares, they will generally convert automatically into Class A common shares, subject to limited exceptions, such as transfers to
affiliates, to trustees for the holder or its affiliates and certain transfers to U.S. tax exempt organizations. The fact that any Class B common shares convert into
Class A common shares if the Founding Shareholders sell or transfer them means that the Founding Shareholders will in many situations continue to control a
majority of the combined voting power of our outstanding share capital, due to the voting rights of any Class B common shares that they retain. However, if
our Class B common shares at any time represent less than 10% of the total number of shares in the capital of the Company outstanding, the Class B common
shares then outstanding will automatically convert into Class A common shares. For a description of the dual class structure, see "Item 10. Additional
Information—B. Memorandum and articles of association.”
Our Articles of Association contain anti-takeover provisions that may discourage a third-party from acquiring us and adversely affect the rights of
holders of our Class A common shares.
Our Articles of Association contain certain provisions that could limit the ability of others to acquire our control, including a provision that grants
authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to
determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our
shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain our
control in a tender offer or similar transactions.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our Class A
common shares and our trading volume could decline.
The trading market for our Class A common shares depends in part on the research and reports that securities or industry analysts publish about us or
our business. If one or more of the analysts who cover us downgrade our Class A common shares or publish
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inaccurate or unfavorable research about our business, the price of our Class A common shares would likely decline. If one or more of these analysts cease
coverage of our company or fail to publish reports on us regularly, demand for our Class A common shares could decrease, which might cause the price of our
Class A common shares and trading volume to decline.
We do not anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future, to fund the operation of our business and future growth. We do not
intend to pay any dividends to holders of our Class A common shares. As a result, capital appreciation in the price of our Class A common shares, if any, will
be your only source of gain on an investment in our Class A common shares.
Our dual class capital structure means our shares are not included in certain indices. We cannot predict the impact this may have on our share price.
In 2017, FTSE Russell, S&P Dow Jones and MSCI announced changes to their eligibility criteria for inclusion of shares of public companies on certain
indices to exclude companies with multiple classes of shares of common stock, such as ours, from being added to such indices. FTSE Russell announced
plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders, whereas S&P Dow
Jones announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in the S&P 500, S&P MidCap 400 and S&P
SmallCap 600, which together make up the S&P Composite 1500. MSCI also opened public consultations on their treatment of no-vote and multi-class
structures and temporarily barred new multi-class listings from its ACWI Investable Market Index and U.S. Investable Market 2500 Index. However, in October
2018, MSCI announced its decision to include equity securities "with unequal voting structures” in its indices and to launch a new index that specifically
includes voting rights in tis eligibility criteria. We cannot assure you that other stock indices will not take a similar approach to FTSE Russell, S&P Dow Jones
and MSCI in the future. Under the announced policies, our dual class capital structure is not eligible for inclusion in any of these indices and, as a result,
mutual funds, exchange-traded funds and other investment vehicles that attempt to passively track these indices will not invest in our stock. It continues to
be unclear what effect, if any, these policies will have on the valuations of publicly traded companies excluded from the indices, but in certain situations they
may depress these valuations compared to those of other similar companies that are included. Exclusion from indices could make our Class A common shares
less attractive to investors and, as a result, the market price of our Class A common shares could be adversely affected.
The dual class structure of our common stock has the effect of concentrating voting control with the Founding Shareholders; this will limit or preclude
your ability to influence corporate matters.
Each Class A common share entitles its holder to one vote per share, and each Class B common share will entitle its holder to ten votes per share, so long
as the total number of the issued and outstanding Class B common shares is at least 10% of the total number of shares outstanding. Due to the ten-to-one
voting ratio between our Class B and Class A common shares, the beneficial owners of our Class B common shares (composed of the Founding Shareholders)
collectively will continue to control a majority of the combined voting power of our common shares and therefore be able to control all matters submitted to
our shareholders requiring the approval of an ordinary resolution so long as the total number of the issued and outstanding Class B common shares is at least
10% of the total number of shares outstanding.
In addition, our Articles of Association provide that at any time when there are Class A common shares in issue, additional Class B common shares may
only be issued pursuant to (1) a share split, subdivision of shares or similar transaction or where a dividend or other distribution is paid by the issue of shares
or rights to acquire shares or following capitalization of profits, (2) a merger, consolidation, or other business combination involving the issuance of Class B
common shares as full or partial consideration, or (3) an issuance of Class A common shares, whereby holders of the Class B common shares are entitled to
purchase a number of Class B common shares that would allow them to maintain their proportional ownership interests in Arco (following an offer by us to
each holder of Class B common shares to issue to such holder, upon the same economic terms and at the same price, such number of Class B common shares
as would ensure that such holder may maintain a proportional ownership interest in Arco pursuant to our Articles of Association).
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Future transfers by holders of Class B common shares will generally result in those shares converting to Class A common shares, subject to limited
exceptions, such as certain transfers effected to permitted transferees or for estate planning or charitable purposes. The conversion of Class B common shares
to Class A common shares will have the effect, over time, of increasing the relative voting power of those holders of Class B common shares who retain their
shares in the long term.
In light of the above provisions relating to the issuance of additional Class B common shares, the fact that future transfers by holders of Class B common
shares will generally result in those shares converting to Class A common shares, subject to limited exceptions as provided in the Articles of Association; as
well as the ten-to-one voting ratio of our Class B common shares and Class A common shares, holders of our Class B common shares will in many situations
continue to maintain control of all matters requiring shareholder approval. This concentrated control will limit or preclude your ability to influence corporate
matters for the foreseeable future. For a description of our dual class structure, see "Item 10. Additional Information—B. Memorandum and articles of
association—Voting Rights.”
We are a Cayman Islands exempted company with limited liability. The rights of our shareholders, including with respect to fiduciary duties and
corporate opportunities, may be different from the rights of shareholders governed by the laws of U.S. jurisdictions.
We are a Cayman Islands exempted company with limited liability. Our corporate affairs are governed by our Articles of Association and by the laws of
the Cayman Islands. The rights of shareholders and the responsibilities of members of our board of directors may be different from the rights of shareholders
and responsibilities of directors in companies governed by the laws of U.S. jurisdictions. As a matter of Cayman Islands law, directors of a Cayman Islands
company owe fiduciary duties to the company and separately a duty of care, diligence and skill to the company. Under Cayman Islands law, directors and
officers owe the following fiduciary duties: (i) duty to act in good faith in what the director or officer believes to be in the best interests of the company as a
whole; (ii) duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose; (iii) directors should not
improperly fetter the exercise of future discretion; (iv) duty to exercise powers fairly as between different sections of shareholders; (v) duty to exercise
independent judgment; and (vi) duty not to put themselves in a position in which there is a conflict between their duty to the company and their personal
interests. Our Articles of Association have varied this last obligation by providing that a director must disclose the nature and extent of his or her interest in
any contract or arrangement, and following such disclosure and subject to any separate requirement under applicable law or the listing rules of the Nasdaq,
and unless disqualified by the chairman of the relevant meeting, such director may vote in respect of any transaction or arrangement in which he or she is
interested and may be counted in the quorum at the meeting. Conversely, under Delaware corporate law, a director has a fiduciary duty to the corporation and
its stockholders (made up of two components) and the director’s duties prohibits self-dealing by a director and mandates that the best interest of the
corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the
shareholders generally. See "Item. 16G Corporate Governance—Principal Differences between Cayman Islands and U.S. Corporate Law.”
As a foreign private issuer, we will have different disclosure and other requirements than U.S. domestic registrants.
As a foreign private issuer, we may be subject to different disclosure and other requirements than domestic U.S. registrants. For example, as a foreign
private issuer, in the United States, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act, including the
requirements to prepare and issue quarterly reports on Form 10-Q or to file current reports on Form 8-K upon the occurrence of specified significant events,
the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules applicable to
domestic U.S. registrants under Section 16 of the Exchange Act. In addition, we intend to rely on exemptions from certain U.S. rules which will permit us to
follow Cayman Islands legal requirements rather than certain of the requirements that are applicable to U.S. domestic registrants.
We will follow Cayman Islands laws and regulations that are applicable to Cayman Islands companies. However, Cayman Islands laws and regulations
applicable to Cayman Islands companies do not contain any provisions comparable to the U.S. proxy rules, the U.S. rules relating to the filing of reports on
Form 10-Q or 8-K or the U.S. rules relating to liability for insiders who profit from trades made in a short period of time, as referred to above.
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Furthermore, foreign private issuers are required to file their annual report on Form 20-F within 120 days after the end of each fiscal year, while U.S.
domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private
issuers are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information, although we
will be subject to Cayman Islands laws and regulations having substantially the same effect as Regulation Fair Disclosure. As a result of the above, even
though we are required to file reports on Form 6-K disclosing the limited information which we have made or are required to make public pursuant to Cayman
Islands law, or are required to distribute to shareholders generally, and that is material to us, you may not receive information of the same type or amount that
is required to be disclosed to shareholders of a U.S. company.
As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain Nasdaq corporate governance standards applicable to
U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This may afford less protection to
holders of our Class A common shares.
Section 5605 of the Nasdaq equity rules requires listed companies to have, among other things, a majority of their board members be independent, and to
have independent director oversight of executive compensation, nomination of directors and corporate governance matters. As a foreign private issuer,
however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. See "Item 16G Corporate Governance—Principal
Differences between Cayman Islands and U.S. Corporate Law.”
We may lose our foreign private issuer status which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us
to incur significant legal, accounting and other expenses.
To maintain our current status as a foreign private issuer, either (a) more than 50% of our Class A common shares must be either directly or indirectly
owned of record by non-residents of the United States or (b)(i) a majority of our executive officers or directors may not be U.S. citizens or residents, (ii) more
than 50% of our assets cannot be located in the United States and (iii) our business must be administered principally outside the United States. If we lose this
status, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed
and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in
accordance with various SEC and Nasdaq rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the
reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the costs we will incur as a foreign private issuer.
Our shareholders may face difficulties in protecting their interests because we are a Cayman Islands exempted company.
Our corporate affairs are governed by our Articles of Association, by the Companies Act (As Revised) of the Cayman Islands and the common law of the
Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under the laws of the Cayman Islands are not as clearly
established as they would be under statutes or judicial precedent in some jurisdictions in the United States. Therefore, you may have more difficulty
protecting your interests than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less formal
nature of Cayman Islands law in this area.
While Cayman Islands law allows a dissenting shareholder to express the shareholder’s view that a court sanctioned reorganization of a Cayman Islands
company would not provide fair value for the shareholder’s shares, Cayman Islands statutory law does not specifically provide for shareholder appraisal
rights in connection with a court sanctioned reorganization (by way of a scheme of arrangement). This may make it more difficult for you to assess the value
of any consideration you may receive in a merger or consolidation (by way of a scheme of arrangement) or to require that the acquirer gives you additional
consideration if you believe the consideration offered is insufficient. However, Cayman Islands statutory law provides a mechanism for a dissenting
shareholder in a merger or consolidation to apply to the Grand Court of the Cayman Islands for a determination of the fair value of the dissenter’s shares if it is
not possible for the company and the dissenter to agree on a fair price within the time limits prescribed.
Shareholders of Cayman Islands exempted companies (such as us) have no general rights under Cayman Islands law to inspect corporate records and
accounts or to obtain copies of lists of shareholders. Our directors have discretion under our Articles of Association to determine whether, and under what
conditions, our corporate records may be inspected by our shareholders, but are not
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obliged to make them available to our shareholders. This may make it more difficult for you to obtain information needed to establish any facts necessary for a
shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
United States civil liabilities and certain judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands exempted company and substantially all our assets are located outside of the United States. In addition, the majority of our
directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located
outside of the United States. As a result, it may be difficult to effect service of process within the United States upon these persons. It may also be difficult to
enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers
and directors who are not resident in the United States and the substantial majority of whose assets are located outside of the United States. Further, it is
unclear if original actions predicated on civil liabilities based solely upon U.S. federal securities laws are enforceable in courts outside the United States,
including in the Cayman Islands and Brazil. Courts of the Cayman Islands may not, in an original action in the Cayman Islands, recognize or enforce judgments
of U.S. courts predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States on the grounds that
such provisions are penal in nature. Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, courts of
the Cayman Islands will recognize and enforce a foreign judgment of a court of competent jurisdiction if such judgment is final, for a liquidated sum, provided
it is not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands’ judgment in respect of the same matters, and was not obtained in a
manner which is contrary to the public policy of the Cayman Islands. In addition, a Cayman Islands court may stay proceedings if concurrent proceedings are
being brought elsewhere.
Judgments of Brazilian courts to enforce our obligations with respect to our Class A common shares may be payable only in reais.
Most of our assets are in Brazil. If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of our Class A common
shares, we may not be required to discharge our obligations in a currency other than the real. Under Brazilian exchange control laws, an obligation in Brazil to
pay amounts denominated in a currency other than the real may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central
Bank, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment
date. The then-prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations
under the Class A common shares.
The Economic Substance Act of the Cayman Islands may affect our operations.
The Cayman Islands has recently enacted the International Tax Co-operation (Economic Substance) Act (As Revised), or the Cayman Economic
Substance Act. We are required to comply with the Cayman Economic Substance Act. As we are a Cayman Islands company, compliance obligations include
filing annual notifications for the Company, which need to state whether we are carrying out any relevant activities and if so, whether we have satisfied
economic substance tests to the extent required under the Cayman Economic Substance Act. As it is a new regime, it is anticipated that the Cayman Economic
Substance Act will evolve and be subject to further clarification and amendments. We may need to allocate additional resources to keep updated with these
developments and may have to make changes to our operations in order to comply with all requirements under the Cayman Economic Substance Act. Failure
to satisfy these requirements may subject us to penalties under the Cayman Economic Substance Act.
Our Class A common shares may not be a suitable investment for all investors, as investment in our Class A common shares presents risks and the
possibility of financial losses.
The investment in our Class A common shares is subject to risks. Investors who wish to invest in our Class A common shares are thus subject to asset
losses, including loss of the entire value of their investment, as well as other risks, including those related to our Class A common shares, us, the sector in
which we operate, our shareholders and the general macroeconomic environment in Brazil, among other risks.
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Each potential investor in our Class A common shares must therefore determine the suitability of that investment considering its own circumstances.
Each potential investor should:
● have sufficient knowledge and experience to make a meaningful evaluation of our Class A common shares, the merits and risks of investing in our
Class A common shares and the information contained in this annual report;
● have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in our
Class A common shares and the impact our Class A common shares will have on its overall investment portfolio;
● have sufficient financial resources and liquidity to bear all of the risks of an investment in our Class A common shares;
● understand thoroughly the terms of our Class A common shares and be familiar with the behavior of any relevant indices and financial markets; and
● be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect
its investment and its ability to bear the applicable risks.
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development of the Company
We were founded in 2004. However, our history goes back to 1941, when the grandfather of our CEO and founder, Ari de Sá Cavalcante Neto, acquired a
small school in downtown Fortaleza. Over decades, the school grew into a large educational group with several branches providing K-12 education to 6,500
students becoming recognized for its quality nationally and for successfully preparing students for the most rigorous national and international college
admission exams for admission into institutions such as Massachusetts Institute of Technology, Stanford University and Princeton University, and national
and international science competitions such as the International Physics Olympiad (IPhO), the International Mathematical Olympiad (IMO) and the
International Chemistry Olympiad (IChO).
Colégio Ari de Sá developed a proprietary educational methodology aimed at improving student academic performance. The methodology is based on
instilling discipline and a culture of hard work, stimulating students to develop a study routine and to demonstrate a proactive and considerate attitude toward
their learning habits.
In 2004, our CEO and founder, Ari de Sá Cavalcante Neto, decided to start an independent company exclusively focused on content and technology for
K-12 schools, SAS. The SAS method was created with the aim of offering it as a solution to private schools across Brazil. Our system uses technology as a
powerful tool to promote improvements in student performance. This is achieved, in part, by allowing students to prepare for class in advance by using our
platform’s video lessons, homework tools and daily class reviews, as well as our practical workbooks with class-specific content, homework and performance
reports. The SAS method is based on the concept of personalized and adaptive learning, aimed at providing tailored education to each student according to
his or her individual needs, with concentration on the main areas in need of improvement, which manifests in higher levels of academic achievement.
Since 2015, we have been investing in technology and our printed methodology has evolved into an educational platform capable of delivering its
curriculum content in both printed and digital format. It has also evolved into a robust omni-channel platform, capable of delivering the entire K-12 curriculum
in both printed and digital format, with lecturettes featuring expert, on-screen teachers and tailored assignments and assessments to engage students and
ensure subject-area mastery across all grades.
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With this integrated approach, students can track their progress and performance, teachers have access to real-time data to evaluate students and
personalize their teaching, and school administrators have access to their school’s performance both on absolute and comparative terms.
With an asset-light and highly scalable business model that emphasizes operating efficiency and profitability, we were able to grow the number of
students served at a 51% CAGR since 2006, reaching a total of 2,279,025 students served in 2022, combining organic growth, strategic investments, and
acquisitions to grow our K-12 education exposure. These initiatives have helped us identify new business potential to enhance our overall growth prospects,
such as education technological features (WPensar, Escola em Movimento, or EEM, Studos and Eduqo), supplemental instruction content (International
School, PES, Nave à Vela, or NAV, Escola da Inteligência, or EI, Pleno, PGS, formerly known as Pearson Global School, and Coleção Mentes), digital-native
content platform (Geekie), B2C online test prep solution (Me Salva!) and life-long learning platform connecting employees of companies across Brasil to free
and discounted courses (Edupass).
On September 25, 2018, the registration statement on Form F-1 (File No 333-7007) relating to our initial public offering of our class A common shares was
declared effective by the SEC. On September 25, 2018, we commenced our initial public offering. On September 28, 2018, we closed our initial public offering,
pursuant to which we issued and sold 12,777,777 Class A common shares for an aggregate price of U.S.$223,611,098 (R$895.2 million).
On October 29, 2019, we completed a follow-on public offering, consisting of 3,450,656 Class A common shares issued and sold by us, and 4,268,847 Class
A common shares sold by certain selling shareholders. The public offering price was US$43.00 per Class A common share. We received net proceeds of
US$143.9 million, after deducting US$3.7 million in underwriting discounts and commissions. On November 26, 2019, an additional 661,112 Class A common
shares were sold by General Atlantic Arco (Bermuda), L.P. following the exercise by the underwriters of their option to purchase additional shares.
On June 4, 2020, we completed a follow-on public offering, by which General Atlantic Arco (Bermuda), L.P. and Alfaco Holding Inc. sold an aggregate
amount of 5,563,203 Class A common shares issued by us, at a public offering price of US$47.70 per Class A common share. We did not receive any proceeds
from the sale of Class A common shares by the selling shareholders in connection with this offering.
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On September 8, 2020, we completed a follow-on public offering, consisting of 2,500,000 Class A common shares issued and sold by us. The public
offering price was US$44.80 per Class A common share. We received net proceeds of US$109.8 million, after deducting USS$2.2 million in underwriting
discounts and commissions.
On January 6, 2021, our Board of Directors approved the Repurchase Program to comply with management long-term incentive plan obligations. Pursuant
to the Repurchase Program, we may repurchase up to 500,000 of our outstanding Class A common shares in the open market, based on prevailing market
prices, or in privately negotiated transactions, over a period beginning on January 6, 2021, continuing until the earlier of the completion of the repurchase or
January 6, 2023, depending upon market conditions. On March 31, 2021, our Board of Directors approved the increase of the share repurchase limit of our
Repurchase Program to up to 2.5 million of our outstanding Class A common shares in the open market, based on prevailing market prices, or in privately
negotiated transactions, continuing until the earlier of the completion of the repurchase or January 6, 2023, depending upon market conditions. As of the date
of this annual report, we had purchased an aggregate of 1,818,779 Class A common shares for a total of approximately US$43.2 million under the Repurchase
Program.
On November 1, 2021, we cancelled 750,000 treasury shares with the approval of our Board of Directors.
On December 1, 2021, we issued US$150 million in senior notes convertible into our Class A common shares (US$100 million to Dragoneer, and US$50
million to General Atlantic), bearing interest at 8% per annum in fixed Brazilian reais and maturing on November 15, 2028. Each note will be convertible at the
option of the holder into our Class A common shares at the agreed conversion rate, which is equivalent to an initial conversion price of US$29 per share. The
conversion price represents an approximately 65% premium to the trailing 30-day volume-weighted share price at the time of signing the investment
agreements for the convertible notes. Dragoneer and General Atlantic will beneficially own approximately 5.6% and 2.8%, respectively, of our total shares (on
an as converted basis for the convertible senior notes).
Following over a decade of growth, and our initial public offering in 2018, we are excited about the future and how technological advances can impact
education. We believe that students are increasingly looking for modern, dynamic and client oriented educational platforms and that our tech-enabled
approach is positioned to deliver a variety of content and provide a new learning experience that is more effective, personal, engaging, and enjoyable.
Acquisitions and Investments
Acquisition of Edupass
On September 3, 2021, we acquired 100% of the equity interest of Edupass for a total amount of R$5 million. Edupass is a technology company that offers
an education as a benefit platform connecting its clients’ employees to a variety of education courses and content.
Acquisition of Eduqo
On April 22, 2021, we entered into a purchase agreement for the acquisition of 100% of the equity interest of Eduqo. The transaction closed on July 1,
2021, following CADE’s approval. Eduqo is a learning management system (LMS) platform that connects students and professors, and offers question banks,
exams and diagnostics to its clients.
The purchase price for the acquisition is structured as follows: (i) R$15,097 million was paid on July 1, 2021, (ii) R$ 6.969 million will be paid on July 1, 2022,
and (iii) R$6.504 million will be paid on July 1, 2023. Additionally, on November 16, 2021, Eduqo shareholders and Arco entered into an agreement to amend the
earnout structure previously agreed, to a fixed value of R$2.603 million to be paid on July 1, 2023.
Investment in Tera
On April 9, 2021, we acquired a 23.43% equity interest of Tera for a total amount of R$15 million. The transaction was divided in a capital injection and an
acquisition of shares from Tera’s founders and early-stage investors. The company offers tech-related courses such as UX design, full stack development and
data analytics, among others, for the B2B and B2C markets.
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Acquisition of Me Salva!
On March 10, 2021, we acquired 100% of the equity interest of Me Salva!, an online educational solution that prepares students to be admitted to the
Brazilian universities, through recorded and live classes, comprehensive exercises, essay writing tools, assessment tests, 1-on-1 tutoring and personalized
study plans.
According to the transaction agreements, 60% of the company’s interest was transferred on the signing date for a total amount of R$27.6 million, and the
remaining 40% will be transferred in 2025, in an amount equal to the multiple of the net revenues of Me Salva!
Acquisition of COC and Dom Bosco learning systems and PGS and Coleção Mentes do Amanhã supplemental solutions
On March 6, 2021, we entered into a definitive agreement with Pearson Education do Brasil Ltda. ("Pearson”) to acquire 100 % interest in P2D, owner of
COC and Dom Bosco learning systems, for the total amount of R$920 million, of which (i) 80% was paid on closing, and (ii) the remaining 20% of the purchase
price will be paid on the first anniversary of the closing date, as adjusted. The transaction also includes an agreement with Pearson to distribute some
supplemental educational solutions for K-12 schools in Brazil.
On October 1, 2021, following final approval from CADE for this acquisition, we closed the transaction. The payment terms set forth in the purchase
agreement were updated upon closing of the transaction to a total purchase price of R$800.4 million, adjusted for COC’s and Dom Bosco’s cash and working
capital positions as of September 30, 2021, paid in a single installment on the transaction closing date. The incorporation of COC and Dom Bosco into
Companhia Brasileira de Educação e Sistema de Ensino S.A., our subsidiary incorporating the acquired businesses, is expected to be concluded in the first
quarter of 2022.
In addition to the acquisition of P2D, CBE entered into a Commercial Cooperation and Distribution Agreement with Pearson pursuant to which CBE would
be the sole distributor in Brazil of the PGS bilingual courseware and teaching methodology and the supplemental solution focused on 21st century skills
Mentes do Amanhã, with the option to acquire these business lines in the long term.
On February 1, 2022, Pearson and CBE entered into an Asset Purchase Agreement and an Intellectual Property License Agreement, pursuant to which
CBE acquired the right of such solutions in Brazil for a total amount to be calculated considering 1.5x Net Revenue for 2022, with a base price of R$15.0 million.
CBE is licensed to use the PGS trademark until 2026, when a new brand is expected to be launched.
Investment in Isaac
On January 25, 2021, we entered into a Series B Ordinary Shares Purchase Agreement, among other ancillary and transactional documents, with INCO
Limited, or INCO, the controlling entity of OISA Tecnología e Serviços Ltda., or OISA (a company indirectly controlled by David Peixoto dos Santos, Arco’s
former CFO), pursuant to which we acquired 8,571,427 series B ordinary shares, equivalent to 30% of the total stock capital of INCO, for R$25 million. INCO
Limited provides financial assistance to private schools.
In addition, on April 22, 2021, we and other investors entered into a Series A and Series A-1 Preferred Shares Purchase Agreement, pursuant to which we
acquired 3,653,788 Series A Preferred Shares of INCO Limited, for R$33.2 million, with the option to acquire an additional 2,935,010 Series A-1 Preferred Shares,
which was exercised on September 17, 2021 for an amount of R$52.0 million.
As of March 31, 2022, INCO Limited had additional investments rounds in which we did not participate. As of the date of this annual report, we hold
47,375,702 shares of INCO Limited, equivalent to 25.06% of its total capital stock (22.43% on fully diluted basis) representing a total investment of R$110.3
million.
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Acquisition of Escola da Inteligência
On December 2, 2020, we closed the acquisition of Escola da Inteligência, the leading solution in social-emotional learning (SEL) in Brazil, which was
approved by CADE, with no restrictions, on the same date. This transaction broadens our supplemental market presence by adding a strong brand to its
portfolio. We believe there is a favorable market trend for SEL, pushed forward by the COVID-19 pandemic, and that Escola da Inteligência is well positioned
to capture this demand outside and within our school base.
The acquisition involves only the private sector business of Escola da Inteligência and under the terms of transaction, we acquired 100% of Escola da
Inteligência’s shares, which will be officially transferred in two phases, of which 60% was acquired for R$288 million, with R$200 million paid at closing and the
remaining R$88 million in the second quarter of 2021. The amount due for the remaining 40% of Escola da Inteligência’s shares will be calculated considering 6
times the 2023 ACV booking value and will be paid in the second quarter of 2023. The remaining shares will be transferred to us on the day of such payment.
For further information, see note 4h to our audited consolidated financial statements.
Acquisition of Studos
On September 21, 2020, we acquired 100.0% of the outstanding shares and voting rights of Studos, a leading provider of adaptive solutions. For further
information, see note 4f to our audited consolidated financial statements. This acquisition is part of our strategy to acquire technology companies that
increase the value of our learning systems to partner schools and parents, improve student’s academic performance and enable teachers to thrive.
Investment in Bewater Ventures I GA
On July 24, 2020, we acquired a 14.48% interest in Bewater Ventures I GA, a fund legally managed by Paraty Capital, through the purchase of 9,670 Class
B quotas for R$9.7 million. As a result of the fund's capital call, we currently own 9,713 Class B Shares, equivalent to a 11% interest, representing a total
investment of R$9.8 million
The fund’s main goal is the minority investment in Grupo A, a company that provides educational solutions for higher education, which happened
subsequently to our investment. For further information, see note 11 to our audited consolidated financial statements.
Acquisition of Positivo Soluções Didáticas
On November 1, 2019, we closed the acquisition of Positivo, one of the largest K-12 content providers to private schools in Brazil, and other companies of
the Positivo Group (as defined below), or Positivo Acquisition. Positivo is part of a group founded in 1972 in Curitiba by a group of teachers as a preparatory
course focused on admission exams to universities in the state of Paraná, or Positivo Group. The preparatory course reached 2,300 enrolled students in the
first year of operation and its success led the group to quickly open new schools for all K-12 grades under the brand Colégio Positivo. In a short period of
time, the proprietary content and methodology developed and used by Colégio Positivo schools achieved significant recognition among teachers, parents
and students. The high-quality content and its dynamic approach led to the foundation of Positivo in 1979, allowing the Positivo brand to expand far beyond
the reach of Colégio Positivo, being adopted by third-party schools in several cities of the state of Paraná and other Brazilian states.
With over 40 years of brand legacy, Positivo evolved to become a leading content providing platform that transforms the lives of many students of
private schools across all Brazilian states. This is a vibrant ecosystem with several opportunities to effectively address the needs of parents, students,
teachers and school owners. Positivo is focused on building long-term relationships with partner schools and this approach is an important factor to its
success, proven by the fact that more than 50% of its client base has over ten years of relationship.
This carve-out acquisition encompassed only the private school learning systems and did not include the other assets of the Positivo Group, such as the
public-school learning system, the printing company, the Universidade Positivo post-secondary education business, and the Colégio Positivo proprietary
schools.
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The agreed purchase price was R$1,684.8 million (equity value), of which (i) 50% was paid in cash on the transaction closing date, and (ii) the remaining
50% will be paid in four installments as follows: (1) 10% per year to be paid in cash in each of 2021 and 2022, and (2) 15% per year to be paid in cash in each of
2023 and 2024, all as adjusted by the CDI rate (Brazilian interest rates).
The Positivo Acquisition allowed us to increase our student base twofold, reaching over 1.2 million students in 2019. In addition, it allowed us to
accelerate our growth with the same B2B2C business model, with predictable subscription-based revenue, high operating leverage and cash flow conversion
while remaining asset-light. By adding complementary assets, Positivo also enables us to broaden our product offerings and expand our footprint. Positivo
comprises two different brands with reciprocal business profiles: (i) Sistema de Ensino Positivo, or SPE, an educational solution consisting of content,
technology and services provided to private schools serving upper-middle-income students; and (ii) Conquista Solução Educacional, or Conquista, which is
focused on private schools serving lower-middle income students. Together, SPE and Conquista enhance our Core Curriculum offering, allowing us to reach a
larger base of schools at different price points. In addition, Positivo also owns Positivo English Solution, or PES, an affordably priced second language-
offering that enhances our Supplemental Solutions.
Positivo has a strong presence in the South and Southeast regions of Brazil, with relatively low geographic overlap with our student base. The
acquisition will also allow us to add opportunities through our scale and technology, strengthening our capacity to invest in high quality content and
technology and enabling us to enhance our student base experience and academic outcomes through technology improvements and our cross-selling
capabilities.
Acquisition of EEM
On June 4, 2019, we closed the acquisition of EEM, or the EEM Acquisition, an app developer that enhances communication between schools and
parents by providing chat-based interactions, location-based identifications, Net Promoter Scores, or NPS, tool to assess parent’s satisfaction and pilot
project related to payments. The EEM Acquisition provided us with new capabilities that further increases our value proposition to partner schools, parents
and students, and also allowed us to access EEM’s network of schools. The purchase consideration transferred was R$18.3 million. The amount of R$16.1
million was paid on the closing date, the amount of R$0.3 million was paid on June 29, 2019, and the deferred payment in the amount of R$1.9 million, which
has been retained for a period of two years as guarantee for the payment of any contingent liabilities, will be released in accordance with the provisions of the
agreement. Any remaining balance will be transferred to the former owners of the acquired entity. For further information, see note 17c to our audited
consolidated financial statements.
Acquisition of NAV
In May 2019, we acquired a 13.2% interest in the share capital of NAV, a developer of competence-based learning content present in more than 50 schools
and reaching 16,000 students, according to NAV’s website, for the total subscription price of R$4.2 million, hereinafter referred to as the NAV Acquisition.
Pursuant to the investment and share purchase agreement, we have agreed to acquire the remaining 86.8% of the outstanding share capital of NAV in three
tranches. We acquired: (i) Tranche 1, corresponding to 37.8% of the outstanding share capital of NAV, on October 29, 2019, for the amount of R$21.1 million,
and (ii) Tranche 2 and Tranche 3, corresponding to 24% and 25% of the outstanding share capital of NAV, respectively, on February 15, 2021, for the total
amount of R$22.6 million. By anticipating the payment of Tranche 3, NAV became our wholly owned subsidiary on February 25, 2021.
NAV enhances our Supplemental Solutions offering and the cross-selling capacity of our Core Curriculum offering through a competence-based
curriculum to address 21st century skills. The EEM Acquisition and NAV Acquisition provide us with new capabilities that further increases our value
proposition to partner schools, parents and students, and also allows us to access each acquisition’s network of schools. Through projects, problem solving
and technology, NAV helps students develop transferable skills, such as critical and creative thinking, and communication skills.
Acquisition of Geekie
In December 2016, we acquired a 6.54% interest in Geekie, an entity that provides technology for adaptive assessment and learning products and engages
in the production, development and licensing of software tailored to the specific requirements of
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education sector customers. On July 3, 2018, we acquired an additional 1.51% interest in the share capital of Geekie, increasing our total interest to 8.05%.
On September 20, 2019, we acquired an additional 0.96% interest in the share capital of Geekie through a capital increase of R$1.2 million. On October 14,
2019, we acquired an additional 1.92% interest in the share capital of Geekie through a capital increase of R$2.5 million, increasing our total interest to 10.92%.
In addition, on October 25, 2019, we acquired an additional 18.44% interest in the share capital of Geekie from a minority shareholder for the amount of R$21.9
million, increasing our total interest to 29.36%. On November 15, 2019, we acquired an additional 1.17% interest in the share capital of Geekie through a capital
increase of R$2.0 million, increasing our total interest to 30.53%. In December 2019, we acquired an additional 7.00% interest in the share capital of Geekie
through a capital increase of R$4.3 million and the purchase of minority shareholders for R$5.8 million increasing our total interest to 37.53% as of December
31, 2019. On March 4, 2020, we acquired an additional 10.51% interest in Geekie’s share capital from minority shareholders for R$12.7 increasing our total
interest to 48.04%. On July 6, 2020, we acquired an additional 4.62% interest in Geekie’s share capital from minority shareholders for R$5.8 million, increasing
our total interest to 52.67%. On September 21, 2020, we acquired an additional 1.76% interest in the share capital of Geekie through a capital increase of
R$4,500 increasing its total interest to 54.43%. On November 11, 2020, we acquired an additional 1.64% interest in Geekie’s share capital through a capital
increase of R$4,500 increasing our total interest to 56.06%. On January 20, 2021, we acquired an additional 1.36% interest in Geekie’s share capital through a
capital increase of R$4,000, increasing our total interest to 57.42%.
On November 27, 2020, we entered into a new shareholders’ agreement with the other Geekie’s shareholders, by which we acquired control of Geekie and
started to consolidate Geekie in our financial statements as our subsidiary. We expect to acquire the remaining 42.58% interest in Geekie’s share capital in June
2022, for the amount to be calculated considering the ACV of Geekie or Arco for 2022 and the company’s debts, whichever results on the highest amount to
be received by the sellers, and the net revenue of Geekie products as of January 2023, which will be payable in June 2022 and January 2023. For further
information, see note 4g to our audited consolidated financial statements.
Acquisition of SAE
In June 2016, we acquired a 70% interest in the share capital of SAE. In October 2017, we acquired the remaining 30% in the share capital of SAE. We
currently hold a 100% interest in the share capital of SAE. The investment in SAE added a new platform for the Company’s Core segment with a different
pedagogical approach and different pricing point. This acquisition enabled the Company to serve a broader range of schools, allowing us to maximize our
market reach and penetration. Thus, with the SAE solution, the Company started to offer a basic subscription solution focused on upper middle income
private schools.
Acquisition of International School
In December 2015 and January 2017, our subsidiary Companhia Brasileira de Educação e Sistemas de Ensino S.A. (formerly known as PSD Educação S.A.
(until 2021) as EAS Educação S.A (until 2020) and SAS Educação S.A. (until 2017)), or CBE, acquired 40% and 11.48% interests, respectively, in the share
capital of International School from Mr. Ulisses Borges Cardinot, pursuant to an investment and other covenants agreement (Contrato de Investimento e
Outras Avenças) dated December 21, 2015 (as amended on January 28, 2016 and January 23, 2017), or the Investment Agreement. Mr. Cardinot is currently the
chief executive officer of International School pursuant to a shareholders’ agreement between Mr. Cardinot and CBE.
The Investment Agreement contains certain contractual arrangements for the acquisition by CBE of the remaining 48.52% interest in the share capital of
International School held by Mr. Cardinot, or the Remaining Interest, divided in two steps: (1) 25% of the share capital between January 1, 2020 and April 30,
2020 at a purchase price equal to the product of 30% and 10 times the accounting EBITDA of International School for the 2019 school year (twelve-month
period between October and September) (subject to certain adjustments); and (2) 23.52% of the share capital between January 1, 2021 and April 30, 2021 at a
purchase price equal to the product of 30% and 10 times the accounting EBITDA (as defined in the Investment Agreement) of International School for the
2020 school year (subject to certain adjustments). In addition, Mr. Cardinot may elect to allocate up to 50% of the total purchase price to subscribe for CBE
shares (which would be valued at the product of 30% and 10 times the accounting EBITDA of CBE (subject to certain adjustments) for the applicable school
year).
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Pursuant to the Investment Agreement, upon the approval of an initial public offering of CBE (1) certain contractual arrangements for the acquisition by
CBE of the Remaining Interest are accelerated; and (2) Mr. Cardinot’s option to allocate up to 50% of the total purchase price to subscribe for CBE shares
must be exercised by Mr. Cardinot at the shareholder meeting approving an initial public offering by CBE. We recognized a financial liability as of December
31, 2021 in the amount of R$379.5 million, which represented the present value of the estimated amount payable to Mr. Cardinot. This financial liability may
vary in subsequent financial periods and depending on the final basis for calculation of the purchase price of the Remaining Interest and it will be updated
accordingly in our financial statements for future financial periods. See "Item 8. Financial Information—A. Consolidated statements and other financial
information—Legal Proceedings.” for more information on this matter.
Acquisition of Content Providers
In April 2015, we acquired a 99.99% interest in Editora e Livraria Alegre POA Ltda., a content provider to upper- and middle-income private schools in
Brazil. In June 2015, we acquired a 99.99% interest in Material Didático Desterro Ltda., a content provider to upper- and middle-income private schools in
Brazil. In September 2017, we acquired a 100% interest in NS Educação Ltda., or NS Educação. NS Educação is an educational content provider to middle class
private schools in Brazil.
Acquisition of WPensar
In April 2015, we acquired a 25% interest in WPensar, a company that develops and licenses school management systems software. On September 21,
2020, we acquired the remaining 75.0% interest in WPensar and we started to consolidate it as our wholly owned subsidiary. For further information, see note
4e to our audited consolidated financial statements.
Corporate Information
Our principal executive offices are located at Rua Augusta 2840, 9th floor, suite 91, Consolação, São Paulo – SP, 01412-100, Brazil. Our telephone number
at this address is +55 (11) 3047-2699.
The SEC maintains an internet website that contains reports and other information about issuers, like us, that file electronically with the SEC. The address
of that website is www.sec.gov. Investors should contact us for any inquiries through the address and telephone number of our principal executive office. Our
principal website is www.arcoeducacao.com.br. The information contained in, or accessible through, our website is not incorporated into this annual report.
B. Business Overview
Our mission is to transform the way students learn by delivering high-quality education at scale through technology to K-12 schools and students.
We provide a complete pedagogical system with technology-enabled features to deliver educational content to private schools and students in Brazil.
Our turnkey curriculum solutions provide educational content in both printed and digital formats delivered through our platform to improve the learning
process.
We have an asset-light, highly scalable business model that emphasizes operational efficiency and profitability. In our B2B2C Core Curriculum and
Supplemental Content Solutions, we operate through long-term service contracts with private schools. These contracts generally have initial terms that
average three years, pursuant to which we provide educational content in printed and digital format to private schools. Our 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, we benefit from high visibility in our net revenue and operating margin, which we calculate by dividing our operating profit
by net revenue over a given period. Our annual retention rate was 93% in 2021, 93% in 2020 and 93% in 2019, which makes our recurring revenue base highly
stable.
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Our network in our B2B2C Core Curriculum and Supplemental Content Solutions as of March 31, 2022, consisted of 8,056 partner schools compared to
6,119 schools as of March 31, 2021, 5,414 schools as of March 31, 2020, and 1,464 schools as of March 31, 2019, representing annual growth rates of 31.7%,
13.0% and 269.8%, respectively.
We had 2,279,025 expected number of enrolled students, or Number of Enrolled Students, across all Brazilian states as of March 31, 2022, compared to
1,489,707 final number of enrolled students, or Final Number of Enrolled Students of as of September 30, 2021 (or 1,785,576 Number of Enrolled Students as of
March 31, 2021), 1,362,141 as of March 31, 2020, and 498,553 as of March 31, 2019, representing annual growth rates of 27.6%, 31.1% and 173.2%, respectively.
In years prior to the COVID-19 pandemic, the difference between our Number of Enrolled Students and our Final Number of Enrolled Students was not
material. However, during 2020 and 2021 and as result of the impacts of the COVID-19 pandemic, our partner schools experienced atypical dropout rates from
March 31 to September 30 ”.
Our B2B2C Core Curriculum and Supplemental Content Solutions business model has allowed us to grow and achieve profitability since our founding.
Our net revenue totaled R$1,232.1 million, R$1,001.7 million and R$572.8 million in 2021, 2020 and 2019, respectively, representing annual growth rates of 23%
and 74.9% in 2021 and 2020, respectively. We generated operating profit of R$129.4 million, R$135.5 million and R$58.1 million in 2021, 2020 and 2019,
respectively. We had a loss of R$154.5 million in 2021, a profit of R$16.8 million in 2020 and a loss of R$9.4 million in 2019, respectively. Our partner school
base is highly diversified, which reduces our dependence on a concentrated number of large clients. Our 10 largest clients represented only 3.4%, 2.6% and
5.6% of our ACV Bookings in 2022, 2021 and 2020, respectively.
ACV Bookings for the Supplemental Solutions (both B2B2C Supplemental Content Solutions and other supplemental solutions) totaled R$323.3 million
for the 2022 school year, resulting in a 2% ACV market share of the total addressable market of such segment in Brazil, which includes after-school education,
based on Educa Insights’ 2021 assessment of the private K-12 market. In addressing the core solutions market, Arco’s ACV Bookings for the 2022 school year
of R$1,236.7 million results in a 24% core solutions market share, which considers the potential market for private K-12 learning systems and textbooks in
Brazil, based on Educa Insights’ 2021 assessment of the private K-12 learning systems market.
We believe that the quality of our platform, together with the credibility of our client base and the strong reputation of our brand, has driven our
significant growth, allowing us to expand our footprint quickly and efficiently in Brazil since our founding. According to the 2022 university admission data
published through the SISU system (Sistema de Seleção Unificada, or Unified Selection System), 1,513 students within our partner school base have been
accepted in the first place of their respective majors (an 15% increase when compared to the 1,318 students in 2021, considering the same solutions).
Considering the number students within our partner school base that were accepted in top 10 positions, the number increased to 7,242 students (an 4%
increase when compared to the 6,981 students in 2021, considering the same solutions).
In March 2021, Arco started serving students directly through the acquisition of Me Salva!, a B2C test prep player. The online solution offers recorded
and live video classes, comprehensive exercises, essay writing tools, assessment tests, 1-on-1 tutoring and personalized study plans. Despite currently
representing only a small and immaterial part of our business, this vertical allows Arco to tap a large and underserved market of students from public schools,
that lack quality education at affordable prices. We also plan to reinforce our Supplemental portfolio by offering schools a solution on the test prep and
tutoring vertical, developed on top of Me Salva!’s know-how and digital offering, allowing them to better prepare their students for the ENEM.
Context
The 21st century has been characterized by rapid and accelerating technological innovation, with students at the forefront of the adoption of new
technologies. We believe that we can deliver a more effective, personal, engaging, and enjoyable learning experience for students by combining high quality
proprietary content and software applications in our simple, integrated, and personalized educational platform. We aim to move beyond traditional educational
models used by schools by empowering educators, school administrators and students to achieve their highest potential through our educational platform.
We founded our company with the aim of creating high quality products that simplify learning and make the education process more efficient.
Traditionally, school administrators required a multitude of vendors for developing content, engaging in teacher
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training, and commercializing and managing K-12 education. Simultaneously, students acquired educational content through textbooks from various
publishers across retail channels. Our platform aims to replace this multitude of third-party educational providers with a streamlined, one-stop solution that
delivers high quality education at scale.
Our Core Curriculum and Supplemental Solutions enable students, teachers, and school administrators to have access to engaging and easy-to-use
resources that propel academic success and meet students’ diverse learning needs. Pairing our printed and digital curriculum with real-time data and teacher-
led learning allows us to personalize learning at the individual level, improving both individual student and aggregate school performance.
We develop our educational content using a model based on extensive research and performance-based standards. We combine printed and digital
content with online lecturettes featuring expert, on-screen teachers and tailored assignments and assessments to engage students and help them master their
subject areas. With this integrated approach, students can track their progress and performance, teachers can access real-time data to evaluate students and
personalize their teaching and school administrators can better manage their school’s performance both on absolute and comparative terms.
The increase in internet penetration and the rapid increase in the use of mobile devices and cloud-based services is broadening access to educational
content and services and expanding the potential reach of educational institutions. Our platform does not require our partner schools to make any significant
capital expenditures or setup investments and is compatible with most mainstream computing platforms (including tablets and mobile phones). Our solutions
are designed to be highly interactive and enjoyable, which we believe results in enhanced educational outcomes when compared to traditional models.
Underlying Trends
We believe that the strength of our business and growth prospects is supported by strong underlying market and industry trends, including:
Demand for quality education is driving a shift from public to private K-12 education
A wide gap in the quality of education exists between public and private K-12 institutions in Brazil, and within the private school market itself. Test
performance is significantly better in private primary and secondary education, as illustrated by the average quality index differential of the primary and IDEB.
As of December 31, 2019 (last data available), private K-12 education schools had an average education quality index score 39% higher than that of public
primary and secondary schools across all school years according to the IDEB quality index differential. As a result, over the last ten years, student
enrollments in private K-12 institutions have increased 7.1%, to 8.1 million in 2021 from 7.6 million in 2011.
Technological innovation is driving enhancements in private K-12 education
We believe the digital transition observed in recent years can provide significant benefits, and opportunities for, education service and content
providers, such as:
● revenue diversification, by means of technological developments in education platforms, such as new tools or capabilities, may be sold for different
purposes and to different consumers;
● customization enabled by technology and tied to a soft adaptation, which allows for distribution to different customers and a scaling by companies
that offer different solutions; and
● margin gains, given a lower cost per student and a larger consumer base that is accessible through technological developments.
Technology has created opportunities to make learning more affordable, accessible, flexible, personal and effective. Classroom instruction and delivery
models are changing and are likely to have a substantial impact on the industry.
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As a result of the COVID-19 outbreak, which was declared a pandemic by the World Health Organization in March 2020, state and local authorities in
Brazil suspended school operations. On-site school activities were postponed, forcing schools to teach classes remotely. Although schools have historically
been late adopters of technology and resistant to change, the impacts of the COVID-19 pandemic led them to turn to technology to continue offering their
students educational content and pedagogical support. As part of our sales strategy during the COVID-19 outbreak, we have unbundled part of our solutions
throughout 2020, allowing approximately 400 schools to use the trial versions of our products and therefore creating a large pipeline of leads for the following
commercial cycles.
We believe that as we have rapidly evolved our solutions to meet schools needs during the COVID-19 pandemic, we are now uniquely positioned to
benefit from the higher willingness from schools to adopt learning systems that offer quality content combined with technological features that will improve
the learning experience.
Importance of K-12 performance in university admissions processes
The best higher education institutions in Brazil are public, with a highly competitive admissions process based largely on challenging standardized
admissions exams. According to the World University Rankings 2022 published by Times Higher Education (THE), 20 out of the 25 top-ranked universities in
Brazil were public as of August 2021. Competition for admission into public universities in Brazil is historically high, accordingly to data from the Unified
Selection System In 2022, there were on average 9 applicants per available seat in public universities. As a result of this competition, parents are increasingly
focused on schools that over-perform in the standardized university admissions tests. Our solution is designed to enhance our students’ ability to perform on
these exams.
Expansion of school hours and after-school programs including, but not limited to, English as a Second Language, or ESL, bilingual programs and
21st century skills programs
The increased focus on education has led to an increase in the length of the average school day. After-school education, comprising of tutoring,
language courses, 21st century skills, such as critical thinking, leadership, collaboration and communication skills, and robotics, among other extracurricular
activities, is also becoming more popular, offering a variety of training and learning programs in which students can participate according to their personal
interests and preferences. Language courses are among the most popular after-school activities and represent an area with significant room for growth,
primarily as a result of:
● the increasing relevance of languages, especially English, in a globalized context;
● the low English proficiency level in Brazil; and
● the emphasis in language classes currently offered by K-12 schools on reading and written communication, despite the fact that the labor market
relies more heavily on oral communication (which also creates a market for bilingual schools).
For many parents, after-school education is considered a lifeline that helps them work without worry and balance their schedules, given (i) that Brazil has
one of the highest average working hours per week in the world, and (ii) the increased participation of women in the workforce. In addition, an increase in
disposable income has increased demand for private education and after-school programs, and parent expectations for their children’s education are high
considering the strong competition to gain admission into top public universities. Accordingly, supplemental education represents a growing opportunity for
private institutions, with an addressable market of R$15.4 billion compared to R$5.2 billion of potential market for private K-12 learning systems and textbooks
in Brazil, based on Educa Insights’ assessment of the private K-12 learning systems market as of December 2021. This is especially the case given the wide
variety of supplemental solutions that can be offered to students during regular and after-school hours.
Obsolescence of traditional content distribution models
We believe that traditional content distribution models are becoming obsolete. Traditional educational publishers are almost exclusively focused on
physical textbooks, which they sell through retailers rather than directly to schools. These traditional suppliers have limited capability to develop and offer
integrated digital solutions to schools, teachers, and students, and typically rely on third-
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party authors, illustrators and graphic designers to develop new content. In contrast, because of our robust technology backbone, use of data and strong
relationships with teachers and administrators, we can offer a comprehensive solution and content that is continuously updated and improved.
Limited and unintegrated product offering
Due to the lack of turnkey education solutions, school administrators often rely on a multitude of third-party vendors for K-12 educational content,
teacher training, student testing, management, and communication tools.
Traditional education providers have struggled to develop mission critical education platforms for several reasons, including the significant costs
associated with the development of content and technologies, as well as the lack of extensive in-house technological expertise. In addition, developing a
comprehensive and effective methodology is difficult to achieve since it requires many years of proven educational experience and a successful track record.
We can replace a multitude of third-party educational vendors with a streamlined and consolidated solution, offering a one-stop shop that delivers
enhanced learning across the educational spectrum.
Our Market Opportunity
According to Educa Insights’ assessment of the private K-12 market, the existing addressable market in Brazil for core curriculum solutions and
supplemental solutions totals approximately R$20.6 billion in sales revenues as of December 2021 of which we currently capture approximately 8% based on
our ACV Bookings as of March 31, 2022. We can address this market by launching new solutions and entering new categories.
Our B2B2C model benefits from structural differences in our market, when compared to the education markets in the United States and Europe. Private
schools in Brazil are generally for-profit institutions, and the private education market in Brazil is large and highly fragmented, primarily a result of lower overall
levels of government funding for K-12 public education. As of December 31, 2021, approximately 8.1 million students were enrolled in approximately 40,542
private schools (17.4% of the total number of K-12 students in Brazil), according to the INEP and the IBGE. In addition, the national curriculum set by the
Ministry of Education requires standardized content across Brazilian schools, which helps create demand for a unified curriculum. Finally, teachers’ unions in
Brazil are relatively less influential than their counterparts in the United States and Europe, where such unions often serve as obstacles to the adoption of
innovations.
We believe that the challenges inherent in the traditional content distribution model, coupled with increasing demand for modern content and integrated
value-added services, present a unique market opportunity for our business. By providing an affordable, modern, and efficient platform, we believe that we
can continue to disrupt the Brazilian education market and increase our penetration into current and new markets.
As for our B2C model, we benefit from the intense competition for higher education admission driving demand for test prep, as the best universities in
Brazil are public (and costs are subsidized by the government) and offer a leap in earnings potential for students. As a result, parents and students
demonstrate unmet needs and willingness to pay for access to top quality content, individualized learning, and convenience. The K-12 tutoring, and test prep
markets are very fragmented and currently mostly offline, while we observe an increasingly preferred for online due to cost, quality and convenience.
Additionally, COVID-19 pandemic to further accelerates the habit-change and conversion from offline to online.
The Arco Way
Quality, a key component for the success in the K-12 market, is always at the center of our decisions and it has been the gear of our virtuous cycle over
the years.
As we continuously invest in quality and customer support, we assist our schools to achieve higher academic results. This is illustrated by the ENEM
strong results of our partner schools, one of the main metrics to measure education quality in Brazil.
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According to the 2022 university admission data published through the Unified Selection System, 1,513students within our partner school base have been
accepted in the first place of their respective majors (an 15% increase when compared to 1,318 students in 2021, considering the same solutions). Considering
the number students within our partner school base that were accepted in top 10 positions, the number increases to 7,242 students (a 4% increase when
compared to the 6,981 students in 2021, considering the same solutions). The strong results achieved by our partner schools improve our brand equity, help
build our reputation and consequently, tends to contribute to our healthy, sustainable organic growth.
As we grow and add new partner schools, our network becomes a powerful source of leads generation and data. In addition, the increased scale allows us
to reinvest in content, quality, and service, contributing to the positive loop.
Our Business Model
Our B2B2C model is financially aligned with our partner schools. Our revenues consist of wholesale content fees paid by our partner schools annually
on a per-student, per-year basis. On average, partner schools charge students’ parents an incremental markup on top of our wholesale fees, ensuring that their
incentives are aligned with ours. Accordingly, we provide a supplemental revenue stream to our partner schools through our B2B2C model, which is a feature
that the traditional education model does not employ. Once schools adopt our platform for a particular class year, access to, and payment for, our platform
becomes mandatory for all enrolled students in each class year, and such payments are charged as a supplement to tuition. Typically, we revise our contract
fees annually, in line with our price-setting policies, which are usually above published inflation indices, to account for improvements in our platform and for
changes in our cost and expenses structure.
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The following chart illustrates our business-to-business-to-consumer (B2B2C) model:
Our B2B2C model has long-term contracts with private schools, high retention rates and high financial predictability. Our three-year standard
contract provides a revenue stream with long-term cash flow visibility. We have a lead time (which we define as the period from the moment of first contact to
the execution of a contract) for the acquisition of new partner schools, and we typically enter into contracts with new partner schools within one year from the
moment of first contact. Once our content is adopted, switching costs (which are the costs that schools incur as a result of switching to our platform) and time
associated with updating the teaching curriculum for each class year work to our advantage. A portion of our historical average 6.0% annual attrition rate is
attributable to the early termination or suspension of performance by us, at our option, of contracts with certain partner schools as a result of their failure to
timely pay our contract fees.
Our B2B2C model is asset-light and scalable business model, with high operating leverage and limited capex requirements. By outsourcing
distribution activities to third parties and developing standard solutions, we have an asset-light and scalable business model that enables us to quickly
expand our customer base with low associated expenses and capital expenditures, including 100% digital marketing and remote negotiation processes with our
customers. This allows us to increasingly expand our margins as we grow the number of students we serve, while generating cash to fund the development of
new products and features, as well as identify acquisitions and strategic investments.
Our platform on the B2B2C model is difficult to replicate. We have continuously developed our platform since our founding, with the benefit of over 50
years of an evolving educational methodology and a dedicated team of education specialists focused on developing and improving our Core Curriculum and
Supplemental Solutions materials. Accordingly, we believe that the depth of our educational content and the technological experience necessary to develop
our products makes our platform difficult to replicate.
Our B2C model is 100% subscription-based and has attractive unit economics. Our revenues consist of retail content fees paid by students upon
subscribing for one of our plans. Despite shorter-term when compared to our B2B2C model, customer acquisition cost is also reduced, leading to profitable
unit economics.
Our Solutions
In the education sector, we believe that quality is fundamental. Our platform on the B2B2C model was developed with the benefit of over 50 years of an
evolving educational methodology and robust track record of academic results. Our track record of high-performing educational outcomes motivated us to
create a digital, technology-driven product that could deliver high quality education at scale.
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Additionally, Positivo is the pioneer in the learning system segment in Brazil and has served the K-12 private school market for more than 40 years. The
pedagogical methodology developed inside the Colégio Positivo schools was transformed into a comprehensive educational solution that quickly expanded
to other schools in Brazil. Over time, Positivo expanded its product offering to address different profiles of schools and increase its addressable market.
We provide a complete suite of turnkey curriculum solutions and technology-enabled features to help our students, teachers, partner schools and
parents, targeting our students’ educational success.
Our turnkey educational platform solutions comprise core K-12 curricula, as well as supplemental educational content currently focused on English as a
second language and 21st century skills programs (such as social and emotional learning - SEL).
Benefits Across Our Educational Platform
We deliver the following benefits to all the stakeholders engaged in the learning process:
● Students: We deliver a personalized, multimedia learning experience, in an omni-channel format. Students can access content in various formats,
including digital, video, print and other audiovisual media aligned with the daily curriculum of their classes. Our platform provides real-time feedback
to students on areas for improvement and benchmarking relative to their peers, which enables us to simultaneously ensure that education is provided
on an individual basis, and that our content is complete, up-to-date, and readily available.
● Teachers: We offer a range of tools to help improve teacher efficiency and learning outcomes. We provide teaching plans for each class, digital
content for classroom review, pre-made class videos, a test builder platform and homework correction automation tools. In addition, teachers can
access students’ performance reports and identify which students are having difficulties in progressing in a given class at any time.
● Administrators: We provide a supplemental revenue stream to our partner schools. In addition, our platform provides back office administrative
support, alongside data and analytics to support decision-making processes. Administrators receive student reports and can analyze student
participation rates, detailed individual performance, an overview by area of knowledge and their schools’ national ranking. They are also able to
benchmark teacher performance to optimize the effectiveness of their teaching staff.
● Parents: Our software brings parents closer to the education process, through an informal communication channel and the opportunity to closely
monitor and engage with their children’s performance and development.
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Our Products
We believe that innovation is an important part of our success. As a technology company in the education sector, we believe that our dynamic and
adaptive nature is essential to our continued growth. Our product offerings comprise two main segments that operate in concert: (i) Core Curriculum; and (ii)
Supplemental Solutions.
Our Core Curriculum comprises high quality content solutions that are designed to address the Ministry of Education’s national 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 media that are aligned with the daily curriculum of their classes. Our Core Curriculum offering serves a broad range of price points, allowing us to
maximize our market reach and penetration. It is offered through seven different brands, consisting of (i) SAS, a premium solution focused on high-income
private schools, with nationwide presence and strong footprint in the Northeast and North regions; (ii) COC, a premium solution focused on high-income
private schools, with nationwide presence and strong footprint in the Southeast region; (iii) SPE, an educational solution focused on upper-middle-income
class private schools, with nationwide presence and strong footprint in the South and Southeast regions; (iv) SAE, a solution focused on upper-middle
income private schools; (v) Dom Bosco, a solution focused on upper-middle income private schools; (vi) Conquista, a solution focused on lower-middle-
income private schools, and (vii) Geekie, a digital-native content platform.
Our Core brands share certain key attributes, such as:
● Online homework assessment: An extensive questions and problem-solving activities database that provides additional teacher-led instructional
content to help meet individual student or small student group needs. Assessments enable thorough, customized evaluations of student
performance over a single lesson, over the course of a topic, or throughout the entire academic year.
● Adaptive learning: A personalized instruction and assessment tool delivered through our exam management portal to help students prepare for and
take exams. The user-friendly reporting and ongoing progress monitoring features enable educators to pinpoint student needs down to the sub-skill
level, while providing real-time feedback at the class level, school and national level. The platform also enables teachers to generate exams based on a
given class profile, using a database containing a broad range of questions.
● Interactive learning: Leveraging the combined abilities of our pedagogical and EdTech teams, we have created augmented reality and video features
throughout our materials, allowing students to point their digital devices at certain sections in our materials to view educational animations or
recorded videos that provide further information on the topic in question, contributing to a more interactive and engaging learning experience.
● Students and teachers web portal: An online environment aggregating relevant content for students and teachers by grade in the form of digital
classes, exam database, assessment templates, teachers’ guides and lesson plans, exams and textbooks’ problem solving in addition to articles and
general educational-related tips.
● In-app communication: A responsive, simple and user-friendly communication tool for partner schools, students and parents, giving them access to
exam results and problem solving, video classes, student grades, as well as the school calendar and attendance records.
● Support to partner schools: Back-office management, educational consulting services, training programs for teachers to assess and improve the
quality of their teaching methods and marketing advisory services.
As part of our Core Curriculum, we offer complementary support to partner schools consisting of:
● Back office management tools: HR tools with financial, student recruiting and administrative features.
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● Educational consulting services to partner schools: Personalized support to ensure complete understanding and appropriate implementation of our
learning platform. This includes constant support to partner schools throughout the school year in connection with educational practices,
administrative, human resources and financial aspects, development of customized students’ assessment models, organization of education
congresses and pedagogical meetings, as well as parents and students counselling.
● Training programs for teachers and school administrators: A suite of materials to allow partner schools and teachers to assess the quality of their
teaching methods and how they can improve them through our learning platform. This includes local, regional and national educational congresses,
forums, seminars and lectures, in addition to training sessions.
● School marketing advisory: A comprehensive range of marketing and communication materials, events and support through our learning platform,
including marketing brochures and recruitment campaigns.
Our Supplemental Solutions comprise of (i) Supplemental Content Solutions, providing additional value-added educational content for which partner
schools can opt-in as an addition to our Core Curriculum, and (ii) Other Supplemental solutions to schools and students such as education technological
features schools (WPensar, EEM, Studos and Eduqo), B2C online test prep solution (MeSalva!) and life-long learning platform connecting employees of
companies across Brasil to free and discounted courses (Edupass).
We have a Supplemental Content solutions market share of 2%, calculated by dividing Arco’s Supplementary Solutions ACV Bookings for the 2022
school year by the total addressable market for Supplemental Solutions, which consists of English as a Second Language (ESL) bilingual programs
(International School, PES and PGS) and 21st century skills programs (Pleno, Escola da Inteligência, NAV and Mentes), based on Educa Insights’ assessment
of the private K-12 market.
We started offering Supplemental Solutions through an ESL bilingual program in 2015, following our acquisition of an interest in International School.
International School provides students with an internationally oriented education, in a multicultural environment, based on a curriculum like the International
Baccalaureate or Cambridge International Examinations. We intend to add non-core supplemental educational modules to our Supplemental Solutions
portfolio over time.
Upon the acquisition of Positivo in 2019, our Supplemental Solution also offers the PES, a bilingual program with an approach that promotes integrated
learning of content and language, in partnership with Cambridge University Press. The program consists of 2-5 weekly hours of English classes with several
tools to develop the skills needed to communicate well. PES also provides teachers’ training and pedagogical support to its partner schools. PES was
launched in 2015 and has a strong cross-sell potential within our Core Solution partner schools’ network and to expand to schools that have not yet adopted
our solution.
In 2019, we started investing in the development of a social-emotional supplemental solution called Pleno, developed to meet schools’ demand for a
product that goes beyond the student’s cognitive development. Through the same B2B2C business model and integrated with the K-12 curriculum, Pleno
helps students to develop competencies and skills, such as self and social-awareness, design thinking and entrepreneurship.
In February 2021, we concluded the acquisition of NAV, a developer of competence-based learning content, enhancing our Supplemental Solutions
offering through a competence-based curriculum to address 21st century skills, which is in our portfolio since May 2019. Through projects, problem solving
and technology, NAV helps students develop transferable skills, such as critical and creative thinking, and communication skills.
In December 2020, we concluded the acquisition of Escola da Inteligência, the leading solution in social-emotional learning (SEL) in Brazil, based on a
proprietary methodology and great reputation in the K-12 market.
In February 2022, we acquired PGS, a K-12 bilingual courseware and teaching methodology, formerly known as Pearson Global School, complementing
our ESL offering with a high-quality solution with a differentiated pricing point; and Mentes do Amanhã ("Mentes”), a K-12 supplemental solution focused on
21st century skills (social-emotional learning, financial literacy, and technology).
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We intend to continue adding supplemental educational modules to our Supplemental Content Solutions portfolio over time, broadening Arco’s
supplemental market presence by adding high-quality solutions with pricing complementarity to our current offering. Arco believes in the large potential for
English as a Second Language and in the favorable market trend for 21st century skills. An even stronger portfolio better positions Arco to capture this
demand outside and within Arco’s school base. The key attributes of our Supplemental Solutions are:
● Proprietary applications: Two complementary applications providing content and English-based games that form part of students’ school year
collections, including a communications tool for partner schools, students and parents.
● Robotics: Pioneering activities that enable students to build and program their own Lego® robots as a way to maximize learning beyond the
classroom experience.
● Combination of concrete materials and animations: Print and digital textbooks combined with interactive animations, educational videos and
exercises.
● Crowdsourced education: Collaborative and versatile platform for classrooms that allows students to collaborate in project building and problem
solving.
Our Supplemental offering also includes other solutions such as technological and managerial features to partner schools, B2C test prep and education as
a benefit.
Our tech and managerial features include (i) WPensar (acquired in 2015), a company that develops and licenses school management systems software, (ii)
Escola Em Movimento, or EEM (acquired in 2019), an app developer that enhances communication between schools and parents by providing chat-based
interactions, location-based identifications, Net Promoter Scores, or NPS, tool to assess parent’s satisfaction and pilot project related to payments, (iii) Studos
(acquired in 2020) a leading provider of adaptive solutions, and (iv) Eduqo (acquired in 2011), a learning management system (LMS) platform that connects
students and professors, and also offers question banks, exams and diagnostics to its clients.
In March 2021, we acquired Me Salva!, a B2C digital test prep solution, allowing Arco to start delivering high quality education to public sector students
at affordable prices. Finally, in February 2022, we acquired Pearson Global School, a K-12 bilingual courseware and teaching methodology, and Coleção
Mentes, a K-12 supplemental solution focused on 21st century skills (social-emotional learning, financial literacy and technology).
In September 2021, we acquired EduPass, a company that offers education as a benefit to corporate clients and aims to prepare the Brazilian workforce to
the future of work through education and upskilling.
Our Team and Culture
We have a strong corporate culture, and we encourage our employees to actively adopt it. We believe in:
● customer first focus;
● ethics, respect and humility;
● excellence and a willingness to learn;
● meritocracy, discipline and an execution mindset; and
● cost focus, with a school owner’s mindset.
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Technology
We believe that the use of technology is fundamental to achieving our goal of placing each student at the center of the educational experience. In our
view, technology is a mean to delivering content through several formats and devices, creating a connection between each student and our common
curriculum through a unique and comprehensive pedagogical approach.
To implement our vision, we’ve redesigned our structure, creating ArcoTech, a centralized tech unit responsible for integrating our user experience¸
maximizing the value of our products and reducing the time spent with repeated demands. The revamp of our technological backbone will allow for an easy
plug-and-play structure for specifics products to all Arco brands - respecting their individuality and value proposition.
Our application programming interfaces, or APIs, provide a standardized way to provision, manage, engage, and deliver content to students, faculty and
administrators. The APIs manage authentication and access for our entire technology stack and is designed to manage and interface with new technologies as
they are introduced.
All our APIs, applications, and application components are designed from the ground up to produce significant, readable and interpretable data. Log
monitoring allows us to proactively identify and mitigate potential capacity, performance, and security issues, while advanced analytics on student usage data
provides the company with powerful insights to evaluate course content, communicate new technology releases, further personalize student’s learning, and
improve user experience and engagement.
Our products help (i) schools to create and manage their classes more efficiently; (ii) teachers to easily transpose their content into the platform, access
thousands of questions, schedule classes and keep up with their student’s development; and (iii) families to be closer to their children’s performance through
the usage of easy-to-use communication tools.
Our team is comprised of software engineers, product managers, user experience and user interface designers, data scientists and digital content
developers, who are responsible for envisioning and creating the ideal digital presentation of our materials within our platform, bringing the work of our
pedagogical and content teams to life.
Following the best frameworks in digital product development, we offer a buy-and-build solution from the customer standpoint, as users and customers
can influence product evolution and participate in early stages of new-product conception.
The main drivers of our technology strategy are:
● Connectivity—connecting content and stakeholders in a seamless way;
● Omni-channel—full access to our content, anywhere, anytime, across devices;
● Empowerment—ability to identify individual needs and build a personalized learning experience;
● User Centered—intuitive design so users can quickly adapt and fully use features to their advantage;
● Management—data and analytics to support educators’ decision-making; and
● Data Analytics—monitor and assess student performance, engagement, and the impact of our solutions.
What Sets Us Apart
We believe that we have the following business strengths that allow us to disrupt the private K-12 education market:
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Disruptive approach to traditional school model
Instead of simply delivering content as a product through textbooks, we provide an education solution through a technology-based platform. We believe
that our platform is cutting-edge, modern, dynamic and client oriented. We offer a multi-channel experience, combining proprietary content and software that
would otherwise require the purchase of multiple, non-integrated solutions.
According to internal studies, we believe that the parents of students enrolled at our partner schools enjoy significant savings since our content
solutions are less expensive than a traditional collection of textbooks, mainly because we can avoid incremental costs associated with a traditional retail
distribution chain by primarily selling directly to our partner schools, as well as certain incremental costs relating to content production. In contrast, the sale
of traditional textbooks often requires publishers to pay authors’ royalties for each book sold, and traditional textbooks are frequently marketed as penned by
specific authors, each of which generally entails higher total royalty costs, whereas we generally acquire rights to content from a large pool of available
authors, without variable payments relating to royalties. Furthermore, we deliver a supplemental revenue stream for our partner schools.
As of December 31, 2021, partner schools charged parents an incremental markup on our wholesale per student prices.
Strong combination of content development team and technology to develop a best-in-class learning experience
As of December 31, 2021, we had a dedicated team of 892 technology and content development employees focused on developing and improving our
Core Curriculum and Supplemental Solutions materials. They achieve this by leveraging feedback from our (i) highly qualified base of over 2,348 experienced
educational authors in Brazil on the quality of materials we produce, and (ii) network of partner schools and teachers on the impact of our materials on student
performance. The advanced state of our platform reflects a process of evolution spanning over a decade, making it difficult to replicate.
Widespread positive customer satisfaction and strong academic outcomes
Our customer satisfaction is driven by our ability to meaningfully improve the performance of our partner schools’ enrolled students on the ENEM and
universities admissions, a prerequisite for entrance into almost all higher education undergraduate institutions in Brazil. According to the 2022 university
admission data published through the SISU system (Sistema de Seleção Unificada, or Unified Selection System):
● 1,513 students within our partner school base have been accepted in the first place of their respective majors (a 15% increase when compared to 1,318
students in 2021, considering the same solutions);
● 7,242 students within our partner school base were accepted in top 10 positions of their respective majors (a 4% increase when compared to 6,981
students in 2021, considering the same solutions).
Strong brand equity and aligned incentives resulting in high retention rates
We prioritize quality by employing a "white glove” service model across our business, with clear financial incentives (in the form of bonuses) to our sales
force that drive long-term relationships with our partner schools. Educational performance is one of the main drivers of school growth, and the success of our
partner schools is a critical part of our value proposition. Due to the quality of our academic outcomes, we rarely lose clients. In addition, we have historically
been highly effective in increasing contract values, achieving an annual retention rate of 93% in 2021, 93% in 2020 and 93% in 2019.
Attractive financial model with a high level of visibility and predictability
We have cash flow visibility given our long-term contracts with partner schools. Initial contract terms generally average three years, with high switching
costs resulting in a customer churn of approximately 7% in 2021. In addition, we benefit from increasing enrollments across partner schools as our
relationships mature and deployments increase, leading to revenue growth and increased operating margins, which contribute to the predictability of our
business.
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Founder-led and experienced management, innovation-driven culture
Our culture flows from our founder and CEO’s family, who have specialized in education for over 50 years. Our founder and CEO, Mr. Ari de Sá
Cavalcante Neto, has brought his family’s successful school formula to scale by creating a leading educational platform. We strive to innovate and instill in
our professionals a passion for serving all our stakeholders and seeking impactful next-generation solutions for private K-12 education.
As of December 31, 2021, the average age of our employees was 33 and 58% of our employees were women. Also, we offer a long-term incentive plan for
key employees and apply meritocratic methods to engage them, recognize their value and maintain their motivation.
Our Growth Strategies
We aim to continue driving rapid, profitable growth and to generate greater shareholder value by implementing the following strategic initiatives:
Deepen relationships with our existing customer base
We intend to increase student enrollments within our existing partner schools at a minimum marginal cost as we see major opportunities for increased
penetration through:
● Increasing the number of class years that adopt our Core Curriculum at each partner school. As of March 31, 2022, our upselling potential would
increase our student enrollments by 29%, translating to approximately 439,146 students; and
● Cross-selling our Supplemental Solutions to currently enrolled class years at our partner schools. As of March 31, 2022, only 14% of our client base
used both our Core Curriculum and at least one Supplemental Solution, thus representing a cross-sell opportunity of over 1,7 million students.
Expand our partner school base
The private education sector in Brazil is very fragmented, with no relevant concentration in one or few providers. As Arco solutions penetrate this market
and the performance of partner schools using our educational platform becomes more widespread and widely known, our sales efforts will benefit from the
referrals generated by current school base.
Add new Supplemental Solutions
We consistently review potential opportunities to provide additional educational solutions that we may integrate into our Supplemental Solutions. We
plan to enforce a disciplined approach to growth by using market validation techniques to assess the likelihood of our partner schools adopting our solutions,
as well as their potential spending. We will also aim to ensure that any new vertical fits within our proven business strategy, through a careful assessment of
available alternatives, such as the number and size of potential adjacent market opportunities, and their relative risk and return.
Continue to innovate and extend our technological leadership
Innovation is a cornerstone of our culture. As such, we employ significant efforts and resources to ensure the constant development and improvement of
our portfolio of solutions. We have also invested in a select group of education technology startups to bring new ideas and solutions into our ecosystem.
These initiatives have helped us identify new business potential to enhance our overall growth prospects, such as education technological features
(WPensar, EEM, Studos and Eduqo), supplemental instruction content (International School, PES, NAV, Pleno, Escola da Inteligência, PGS and Coleção
Mentes), digital-native content platform (Geekie), B2C online test prep solution (Me Salva!), and life-long learning platform connecting employees of
companies across Brazil to free and discounted courses (Edupass).
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We intend to increase the functionality of our platform and continue our investment in the development and acquisition of new applications that extend
our technological leadership. We also intend to continue to improve and update our print and digital content based on the real-time feedback we receive from
our partner schools.
Continue to pursue M&A opportunities
We plan to continue pursuing acquisitions that are complementary to, or that will help us diversify, our business. We intend to maintain a disciplined
approach towards evaluating possible targets and integrating acquisitions into our business model. Our preferred acquisition targets are core or supplemental
educational platform providers that engage in delivering high quality K-12 educational content through software-based platforms pursuant to B2B2C and B2C
business models. We are currently evaluating possible acquisition opportunities and submit non-binding proposals from time to time.
We believe that we have developed a strong capability and track record of identifying, negotiating, and integrating acquisitions. Moreover, we have
developed a systematic model that enables us to integrate our acquired businesses in a timely and efficient manner. Since 2011, we have successfully acquired
or invested in 22 solutions. Our acquisition strategy is focused on expanding our operations into new regions within Brazil and adding new products and
technologies to accelerate our pace of innovation and broaden our footprint.
We have already executed several strategic transactions since our initial public offering. These acquisitions have a strong fit with our business and have
been executed based on three main pillars: (i) boost growth, accelerating the expansion of our partner school base; (ii) increase cross-sell opportunities,
extending our product offering; and (iii) enhance the client experience, adding value-add tech features. See "Item 4.A. History and development of the
company—Acquisitions and Investments.”
Marketing and Sales
Our platform has evolved into a complex solution. The adoption of our platform by partner schools requires us to first build trust and confidence in our
solutions, which can only be achieved by engaging them with our solutions and demonstrating a proven track record of success and quality, while constantly
monitoring client satisfaction and feedback.
We have a non-traditional sales approach, which is structured around a practice we refer to as "Educational Consulting,” which reflects both our core
value of ensuring that education is our first priority, as well as the unique sales dynamics associated with our industry.
We have a lead time (which we define as the period from the moment of first contact to the execution of a contract) for the acquisition of new partner
schools, and we typically enter contracts with new partner schools within one year from the moment of first contact, which requires a series of interactions
and constant contact, to build a trust-based relationship with target and partner schools. Our sales strategy is based on creating touch points to highlight the
quality of our solutions. We aim to achieve this with dedicated sessions for experimenting and testing with our platform. We also hold several specialized
events aimed at target and partner schools, product journeys and guided visits to our units, and participate in industry fairs.
The success of our sales process requires uniquely qualified professionals, who must not only have an academic background, but are also sales oriented.
We invest a significant amount of time and resources to recruit and train our sales force, averaging approximately 150 hours of training per year per person.
After the initial training and exposure to our Educational Consulting environment, each professional begins working by shadowing an experienced consultant.
It takes approximately a year of shadowing before each new professional can work individually on our behalf. In 2021, we had over 3,199 applicants for our
consultant positions. Currently, we employ more than 753 sales and marketing professionals. Our consultants’ incentives are also aligned with our long-term
goals and are tied to our profitability, as a significant portion of their annual compensation is variable and is paid out to them annually in the form of a bonus
provided certain targets are met.
To improve and optimize our partner school acquisition process, we structured a market intelligence division, which focuses on mapping and segmenting
our target markets to support and focus our sales strategies, as well as providing our sales consultants with industry knowledge and high-level market
analysis and insights. Our market intelligence division has access to a significant volume of
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data, is continuously undertaking industry research and analysis and receives regular feedback from, and is in regular contact with, our consultants deployed
in the field.
Additionally, we promote specialized events that are aimed to retain current partner schools. The most relevant event is Positivo’s Course Program that
provides teacher’s training, workshops of recent trends in education and lectures from highly specialized and trained pedagogical professionals. In 2021, the
Course Program reached 3,975 teachers.
In addition, we work in conjunction with a branding agency, which assists us in developing and strengthening our brands, increasing their national
awareness, and building our institutional image. Our brand portfolio is structured to reflect our value proposition and leverage our marketing and sales
strategy. A study conducted by Expertise as of July 2021 showed that the Positivo brand is the most recognizable among parents, teachers, and school
events.
Furthermore, we have a loyalty program aimed at strengthening the relationship with partner schools and increasing the length of the contract. The
loyalty program allows SPE to offer more personalized consulting services from our pedagogical experts, literature materials to complement the school’s
curriculum, cooperative media, and other products or services, to increase a contract’s profitability.
Our Customer Service and Support
We believe that the best way to ensure the loyalty of our customers is to maintain a healthy, long-term relationship with our partner schools. We aim to
achieve this through our customer engagement and support service, which supports partner schools in the implementation and integration of our educational
solutions into their systems, as well as help them identify and achieve their pedagogical, business and management objectives, including legal, finance and
marketing. Our customer service and support come in a variety of forms such as on-site visits, remote assistance, workshops, and events for partner schools.
We assign independent and dedicated client-centric customer support teams to each of our solutions. Customer service and support is comprised of two
departments which are focused on developing partner school relationships and are available to address any post-implementation issues that may arise: (1)
pedagogical consulting, and (2) customer service:
Pedagogical Consulting
Our pedagogical consulting department is responsible for the pedagogical supervision and educational development of our partner schools. It aims to
ensure that our educational platform is being used efficiently, and to actively assist our partner schools in improving the learning experience of their students
and helping them develop the necessary skills inside and outside the classroom. It also leverages a dedicated management team to train and support our
partner schools in maximizing their supplemental revenue streams.
Our pedagogical consulting team activities with partner schools include:
● implementing pedagogical methodologies in connection with our educational platform and associated educational materials, making pedagogical
recommendations, understanding school communities, and coordinating lesson planning;
● periodic in-person meetings and coordinated site visits to evaluate the educational process, assisting partner school owners and faculty members to
develop learning and interaction projects through the use of educational media content and new technologies, and conducting lectures for parents
and students;
● continuous online or on-site training for teachers and school coordinators; and
● developing educational evaluation models tailored to each partner school’s profile and needs, and training school owners and managers to use the
school owner/manager specific features of our educational platform.
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Customer Support
Our customer support department provides day-to-day customer and administrative support to our partner schools in connection with our educational
platform by e-mail and/or by telephone. Our customer support department interacts with our pedagogical consulting department when necessary to minimize
the risk of miscommunication and ensure a unified approach to customer satisfaction.
Our Geographic Presence
We believe our platform can be adopted by virtually any private K-12 school in Brazil. We believe that our product offering addresses Core and
Supplemental curriculum needs for all Brazilian schools. As of March 31, 2022, our network consisted of 8,056 unique partner schools and 2,279,025 Number of
Enrolled Students across all Brazilian states and in 1,878 cities, comprising students from kindergarten to high school. Our national presence has consistently
expanded over the last five years, through both organic and non-organic growth and our largest client accounted for only 0.5% of our ACV Bookings.
Our Clients
We provide a complete pedagogical system with technology-enabled features to deliver educational content to K-12 schools in Brazil. Our turnkey
curriculum solutions provide educational content in both printed and digital formats delivered through our platform to improve the learning process. Our
network as of March 31, 2022, consisted of 8,056 partner schools. Our partner school base is highly diversified, which reduces our dependence on a
concentrated number of large clients. Our 10 largest clients represented only 3.4%, 2.6% and 5.6% of our Delivered ACV Bookings in 2021, 2020 and 2019,
respectively. Even though our partner schools pay for our solutions, we view students, parents, teachers, school management and teachers as our customers.
Our Competition
We compete with traditional publishers and textbook providers, other providers of core curriculum solutions, as well as with online education platforms.
Factors influencing competition in this industry may include price, overall education experience and track record, industry experience and reputation, content
quality, availability of technology, faculty, facilities, location and program offerings, among others.
Most traditional publishers and textbook providers are typically focused exclusively on physical textbooks. They do not produce their own content, do
not update their content frequently, and do not have developed digital platforms. Furthermore, we believe that traditional publishers and textbook providers
whose strategy it is to develop education solutions similar to ours do not possess the content development expertise, brand awareness, or the track record to
sell such solutions directly to schools.
Other core curriculum solutions providers offer primarily printed content and a limited amount of digital content. Other online platforms that offer
education solutions through digital channels face difficulties to efficiently integrate solutions for schools, parents, students, and teachers. We believe our
proprietary content is engaging to students, teachers, and parents, as illustrated by our ability to persuade schools to switch from other products to our
products.
We seek to differentiate ourselves from our competitors primarily on the basis of our simple, integrated and personalized educational platform. We believe
the following factors are critical to success in the private K-12 education in Brazil:
(1)
level of a solution’s effectiveness, personalization, engagement and enjoyment;
(2) quality of the user experience and customer service;
(3) breadth and depth of features and functionalities;
(4) brand recognition and academic outcomes; and
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(5) overall cost of education solutions.
Seasonality
Our revenues and operating results normally fluctuate because of seasonal variations in our business. For further information on seasonal variations in
our business, please see "Item 5. Operating and Financial Review and Prospects—A. Operating results—Revenue Recognition and Seasonality.”
ESG, at Arco
Arco was born with the mission to transform the way students learn by delivering high quality education at scale. We believe that our mission and the
social impact we aim to achieve will only be delivered if we are able to engage our stakeholders and manage properly our Environmental, Social and
Governance risks.
During 2021, we conducted a ESG’s materiality process in consultation with a specialized ESG firm, which identified the material topics for our company
and prioritized them through interviews and a survey with over 200 stakeholders, including employees, investors, sell-side analyst, suppliers and Non-
Governmental Organizations supported by the Arco Institute. We also established an ESG Advisory Group constituted by Arco’s CHRO, COO, CFO and legal
department, which supported the establishment of material topics, the prioritization according to the business impact, the engagement of the whole team and
communication with different areas of the Company.
As a result, we have established three ESG pillars:
Promote the Impact on Education
To guarantee Arco’s continuous evolution, we need to keep delivering and improving the quality of our content and technology, be able to grow in scale
and increase the accessibility of our products and services.
Our progress in those topics is quantified by our ability to:
● Develop educational tools that engage our students and improve the performance of our partner schools in the main university’s admissions exams;
● Build long-lasting and reliable relationships with our customers; and
● Increase the access to our products to different socioeconomic classes. We have progressed in this topic by providing educational solutions with
different average tickets to schools, therefore reaching schools with a diverse tuition profile, and also through Arco Institute, our social initiative that
supports public schools’ students, delivering educational solutions and institutional assistance to different educational organizations.
In our latest ESG report, we have quantified those aspects through different metrics, such as NPS, retention rates and number of National Exam approvals,
among others.
Focus on our people
Arco is a company built upon the belief that our people is our strength. We are constantly looking for highly talented and diverse people, aligned with
our values and engaged on delivering our purpose. We work to maintain a sense of ownership and engagement by investing in the development and
continuous evolution of our people, creating a diverse environment in which people belong and can prosper.
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To measure the success of our people-centric culture, our teams’ perception regarding Arco and its career opportunities, we track:
● The voluntary turnover of our talents, developing strategies to understand the main reasons and to reduce it;
● The evolution of our Employees’ Net Promoter Score (eNPS), strengthening our culture by building rituals, moments with the leadership and
development opportunities;
● The constant evolution and satisfaction of our interns and trainees, guaranteeing growth opportunities and the recognition of our teams; and
● Metrics on diversity (regarding gender and ethnical aspects), by spreading educational contents, raising awareness about the theme and creating
learning trails for the leadership.
Strong and sustainable structure
This pillar can be divided in two main parts. The first part, relating to our corporate governance and stakeholders’ alignment, is ensured by:
● Maintaining a solid and reliable Code of Ethics, which guides the work of all employees and partners according to the same principles,
● An independent and confidential Ethics Channel, where people feel safe to make their complaints;
● An alignment of our Executives compensation with our main business goals;
● Building up teams with diverse and independent perspectives on our business, both on a Board and Executive level; and
● Guaranteeing the data security of our employees, partner schools and students by using attested security frameworks.
For further information on Corporate Governance, please see Item 16.G of this annual report, as well as the main indicators on our ESG Report.
With respect to the second part, regarding the sustainability of our supply chain, we work constantly to reduce our impact in the environment by:
● Using sustainability criteria to choose our printing suppliers; and
● Following the path of our paper, to make sure it is correctly recycled or covered by take-back programs.
We have also established goals to constantly evolve our ESG practices. For further information, please see our 2021 ESG Report published on our IR
website (https://investor.arcoplatform.com/esg/).
Legal Proceedings
See "Item 8. Financial Information—A. Consolidated statements and other financial information—Legal Proceedings.”
Regulatory Overview
The Brazilian constitution establishes education as a right of all citizens, the provision of which is a duty of the state and the family. Accordingly, the
government is required to provide all Brazilian citizens with access to free primary education that requires
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compulsory attendance. Private investment in education is permitted so long as entities providing education services comply with the applicable rules and
regulations.
The Brazilian education system is organized as a cooperation regime among federal, state, and municipal governments. The federal government is required
to organize and coordinate the federal education system in order to guarantee equal opportunity and quality of education throughout Brazil, as well as
regulating higher education activities. Brazilian states and the Brazilian Federal District are required to focus on primary and secondary education, while
municipalities are responsible for providing preschool and primary education, and each is responsible for establishing and implementing the relevant rules and
regulations for each educational stage the subject of its focus, including monitoring and evaluation, and the issuance of all relevant authorizations,
recognitions, and qualifications for each such educational stage.
Law No. 9,394/1996, or National Education Guidelines Law (Lei de Diretrizes e Bases da Educação Nacional), or LDB, establishes the guidelines for the
provision of education services in Brazil and sets forth the federal government’s duty to: (1) coordinate the national education system; (2) prepare the
National Education Plan; (3) provide financial assistance to the states, the Federal District and municipalities; and (4) define, in cooperation with other federal
entities, the responsibilities and guidelines for primary and secondary education.
In addition, the federal government, through Law No. 13,005 of June 25, 2014, implemented the National Education Plan (Plano Nacional de Educação), or
PNE, valid for ten years from the date of its enactment. The PNE established objectives for primary and secondary education that must be met by the Brazilian
federal system. Some of these objectives are: (1) the universalization of preschool education, with a target to enroll at least 50% of all children up to three
years of age in schools by 2024; (2) the universalization of primary education, with a target to enroll at least 95% of children between the ages of six and
fourteen in schools by 2024; (3) the universalization of secondary education, with a target to enroll at least 85% of adolescents between the ages of 15 and 17
in schools by 2024; (4) to ensure that all children learn the Portuguese alphabet by the third year of primary education; (5) to make available full-time education
in at least 50% of public schools; (6) to improve the quality of primary education as evaluated by the IDEB; (7) to ensure that all students are literate by the
time they are 15 years old; (8) to make available at 25% of primary and secondary education to young adults and adults; and (9) to increase enrollment in
professional studies to three times the current enrollment rate. Accordingly, each of the federal, state and municipal governments was required to prepare a
ten-year education plan and establish policies, guidelines and objectives applicable to the segment of the Brazilian education system over which it is
responsible. In addition, these objectives act as guidelines for the private education sector.
Primary and Secondary Education
Primary and secondary education in Brazil is equivalent to K-12 education in the United States, and consists of elementary school, junior high and high
school, which are regulated by the LDB and the PNE.
The LDB regulates a nationwide, common core curriculum, the number of teaching hours, the minimum classroom attendance and grade advancement.
States, municipalities, and educational institutions can pass rules and regulations according to specific regional and local requirements, such as differences in
curricula and calendar, grade advancement and issuance of academic documentation for primary and secondary education students.
The PNE establishes ten-year targets for all the levels and stages of education, mandating that states and municipalities create and establish similar plans
compatible with such national targets. It is incumbent upon the Primary and Secondary Education Secretariat (Secretaria de Educação Básica), or SEB, under
the supervision of the MEC, to monitor compliance with the PNE by states and municipalities. This inspection and monitoring include guidance and rules for
assessing the primary and secondary education stages.
Under the federal constitution and the LDB, access to primary and secondary education is a right of all children from the ages of four to 17. Following
amendments to Law No. 11,274 on February 6, 2006, the duration of primary and secondary education was extended from a period of eight years to a period of
nine years. Among the purposes of primary education are: (1) development of the capacity to learn, including basic abilities in reading, writing and arithmetic;
(2) comprehension of the natural and social environment, the political system, technology, arts and social values; (3) development of the capacity to acquire
new knowledge and abilities and
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the formation of attitudes and values; and (4) strengthening family ties, social cohesion and mutual tolerance. Assessment of primary education is
coordinated by the state legislation of each individual state, on a case-by-case basis.
Secondary education is designed to fulfill the government’s duty to progressively complete the formation of the citizen, seeking universalization of scope
and coverage. Secondary education is conducted for a period of not less than three years and seeks: (1) the consolidation and deepening of the knowledge
acquired in primary education; (2) the basic preparation of the person being educated for work and to be able to adapt within the labor market or pursue
further education; (3) the improvement of the student as a person, including ethical formation and the development of intellectual autonomy and critical
thinking; and (4) the comprehension of the scientific and technological bases of the productive processes, relating theory to practice in each discipline.
Assessment of secondary education is conducted on a national scale and coordinated by the MEC.
Law No. 13,415/2017 amended the LDB and changed the structure of secondary education, increasing the academic courses load per year and
establishing a new curricular structure that comprises a specific BNCC. Following this normative change, Ruling No. 1,210/2018 approved the new National
Curriculum Guidelines (Diretrizes Nacionais Curriculares or DCN) for High School, which is known as the "New High School” (Novo Ensino Médio).
This new model is expected to be implemented gradually starting in 2022 (with implementation expected to be concluded by 2024) and one of its main
innovations is the establishment of training itineraries (itinerários formativos). The structure of training itineraries is established by the DCN for High School,
and characterizes them as a set of subjects, projects, workshops, study centers, among other situations, that students will be able to choose according to their
areas of interest as well as life and career projects and aspirations. The training itineraries focus on deepening the study of a specific field of knowledge
(Mathematics and its Technologies, Languages and its Technologies, Natural Sciences and its Technologies and Applied Human and Social Sciences) or
technical and professional training (FTP) chosen by the student and each school must offer at least one itinerary, while each municipality must offer at least
two itineraries, in order to ensure options for students.
Regulatory Bodies
The main regulatory bodies of the Brazilian education system are:
● the MEC;
● the National Education and Research Institute (Instituto Nacional de Estudos e Pesquisas Educacionais Anísio Teixeira), or INEP;
● the CNE;
● the CEB;
● the Higher Education Board (Câmara de Educação Superior), or CES;
● State and Municipal Secretariats (Secretarias Estaduais de Educação and Secretarias Municipais de Educação, respectively); and
● State and Municipal Councils of Education (Conselhos Estaduais de Educação and Conselhos Municipais de Educação, respectively).
The MEC is Brazil’s highest governmental body for education. It formulates and evaluates Brazilian national education policy, ensuring the quality of
education and compliance with education regulations. The INEP is an independent related federal entity responsible for evaluating educational institutions in
Brazil, as well as conducting research to provide a reliable database for public use.
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The MEC is assisted by the CNE, which is the entity with regulatory power and deliberative authority to ensure national education improvement. The
CNE is comprised of the CEB, which is the federal agency responsible for the regulation of the K-12 education system, and the CES, which is the federal
agency responsible for the post-secondary education system. Both regulatory bodies are composed of 12 members appointed by the President of Brazil.
States and municipalities are responsible for regulating K-12 education. State Secretaries of Education (Secretarias Estaduais de Educação) are assisted
by the State Councils of Education (Conselhos Estaduais de Educação) and are the main regulatory bodies for primary and secondary school education. The
Municipal Secretaries of Education (Secretarias Municipais de Educação) are assisted by the Municipal Councils of Education (Conselhos Municipais de
Educação) and are the main regulatory bodies of preschool education.
The LDB grants power to states and municipalities to authorize, accredit and supervise primary and secondary education institutions. This is achieved
through each governmental entity’s respective Department of Education.
Regulations Applicable to the Company’s Activities
The Company is not directly regulated by the MEC nor any other regulatory agency. However, our educational platform and related educational materials
seek to comply with the LDB and the guidelines established by the BNCC. In addition, our partner schools are K-12 education providers and are directly
regulated by the educational authorities explained above and must comply with their regulations.
The BNCC is a set of guidelines that provides a curriculum specifying the core skills and knowledge required to be taught as part of primary and
secondary education in Brazil and each school has the autonomy to elaborate or adapt their curricula and pedagogical projects according to such guidelines.
The BNCC guidelines were established following overall poor student performance levels achieved while the predecessor education guidelines were in effect.
Several indicators suggest that the predecessor guidelines were failing in many ways, leading the MEC to initiate discussions relating to a new method based
upon a comparison between Brazil and other countries’ results, which formed the basis for developing the BNCC. The LDB and the BNCC establish what
subject matters shall be taught for each level of education (early childhood education, primary education and secondary education), and we are constantly
working on our content to ensure that they comply with these guidelines, as well as with our partner schools’ demands.
As provided by the LDB and the BNCC, early childhood education should enable children to live in society, to play, to participate, to explore, to express
themselves, and to know themselves. Primary education, in turn, shall offer the following subject matters: (i) Portuguese; (ii) Arts; (iii) Mathematics; (iv)
Geography; (v) History; (vi) Religious Studies; (vii) English; (viii) Science and (ix) Physical Education. Also, according to the current BNCC, approved by
Ruling No. 1,210, 2018, secondary education shall offer curricula covering the following subjects (i) Portuguese; (ii) Arts; (iii) Mathematics; (iv) Geography;
(v) History; (vi) Physics; (vii); Chemistry; (viii) Biology; (ix) English, (x) Science, (xi) Sociology; (xii) Philosophy; and (xiii) Physical Education. As our partner
schools are private and have the autonomy to establish their pedagogical projects, there are no other guidelines relevant to the materials provided.
While following the BNCC is still required of every school in the country, there are opportunities to provide content solutions and after-school solutions
to improve and adapt to the new status quo in Brazil’s education market.
Syndicates
Under Brazilian labor law, all companies and employees are represented by unions, regardless of whether they are unionized. The unions representing the
companies and the employees negotiate the terms of collective bargaining agreements on an annual basis or every two years. Employers are required to grant
employees all the rights and working conditions set forth in the collective bargaining agreement, regardless of whether the employee is unionized or not. The
employees who choose to be unionized are required to contribute to the workers’ syndicate that represents their sector. Teachers and professors may
contribute to the Brazilian Teacher’s Union (Sindicato dos Professores). The syndicate contribution is deducted once a year by the employer directly from
such employee’s payroll in an amount equal to one working day’s salary, subject to the express authorization of such employee.
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Data Protection
Cybersecurity has become a top priority for regulators around the world, and in Brazil it is no different. Having come into effect in September 2020, the
Brazilian Data Protection Law (Law No. 13,709/18, Lei Geral de Proteção de Dados), or LGPD, is a comprehensive personal data protection law establishing
general principles and obligations that apply across multiple economic sectors and contractual relationships.
The LGPD applies to individuals or legal entities, private or government entities, who processes personal data in Brazil or collects personal data in Brazil
or, further, when the processing activities have the purpose of offering or supplying goods or services to data subjects located in Brazil. The LGPD
establishes detailed rules for processing personal data, which includes the collection, use, transfer and storage of personal data and will affect all economic
sectors, including the relationship between clients and suppliers of goods and services, employees and employers and other relationships in which personal
data is collected, whether in a digital or physical environment.
Pursuant to the LGPD, security breaches that may result in significant risk or damage to personal data must be reported to the National Data Protection
Authority (Autoridade Nacional de Proteção de Dados), or ANPD, the data protection regulatory body, within a reasonable time period. The notice to the
ANPD must include: (a) a description of the nature of the personal data affected by the breach; (b) the affected data subjects; (c) the technical and security
measures adopted; (d) the risks related to the breach; (e) the reasons for any delays in reporting the breach, if applicable; and (f) the measures adopted to
revert or mitigate the effects of the damage caused by the breach. Moreover, the ANPD could establish other obligations related to data protection that are
not described above.
LGPD allows private right to petition, so we are subject to individual claims for violations of LGPD. The penalties and fines for non-compliance with the
LGPD include: (1) warnings, with the imposition of a deadline for the adoption of corrective measures; (2) fines, up to a maximum amount of 2% of the
company or group turnover in Brazil, limited to R$50.0 million per violation; (3) disclosure of the violation; (4) the restriction of access to or deletion of the
personal data to which the violation relates (5) in case of repetition of the violation, temporary suspension of the database or of data processing activities.
We started implementing the LGPD requirements in January 2020, adapting our websites, e-commerces and systems and processes to the new legislation
and creating new privacy policies and warnings. We are developing our LGPD program taking into account the changes in cultural and consumer attitudes
towards the protection of personal data law and to comply with any new regulations, creating more training for our employees and clients to promote
conscience and promote conscience and change of data analysis and treatment. In 2021 we mapped and identified the risks involved with our business, as we
process data on children and adolescents, in order to monitor and control sensitive points to promote greater safety, law enforcement and risk reduction. This
data protection impact report is a report of the controller's documentation that contains the description of the processes of processing personal data that may
generate risks to civil liberties and fundamental rights, as well as measures, safeguards and risk mitigation mechanisms. In addition, our Privacy and
Cybersecurity Committee is composed of our DPO and other senior leadership members, bringing diverse backgrounds to the establishment of related LGPD
and cybersecurity practices and measures, as well as readjustments and quality preservation initiatives.
C. Organizational Structure
We are a Cayman Islands exempted company incorporated with limited liability on April 12, 2018. Arco became the holding company of Arco Educação
S.A. and its operating subsidiaries, including CBE, which provides educational content from basic to secondary education (or K-12 curriculum).
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The table below is a list of the Company’s subsidiaries, joint ventures, and associated companies as of December 31, 2021:
Name
Arco Educação S.A.
Companhia Brasileira de Educação e Sistemas de Ensino S.A.
Arco Ventures S.A.
Barra Américas Editora Ltda.
Distribuidora de Material Didático Desterro Ltda.
SAS Sistema de Ensino Ltda.
SAS Livrarias Ltda.
SAE Digital S.A.
International School Serviços de Ensino, Treinamento e Editoração, Franqueadora S.A.
Nave à Vela Ltda.
EEM Licenciamento de Programas Educacionais Ltda.
NLP Soluções Educacionais Ltda.
Bewater Ventures
WPensar S.A.
Geekie Desenvolvimento de Softwares S.A.
Studos Software Ltda.
Escola de Inteligência Cursos Educacionais S.A.
Arce Participações Ltda.*
Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A.
Desenvoolva – Educação, Treinamento e Consultoria Corporativa Ltda.
P2D Participações Ltda.
Me Salva! Cursos e Consultoria S.A.
Tera Treinamentos Profissionais S.A.
Inco Limited
Principal Activities
Holding
Educational content
Educational content
Educational content
Educational content
Educational content
Educational content
Educational content
Educational content
Educational content
Educational technology
Educational content
Private equity
Educational technology
Educational technology
Educational content
Educational content
Holding
Educational technology
Educational Development
Educational content
Educational content
Educational content
Educational Solutions
Country Investment Type
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Cayman
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Investee
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Investment
Investment
Direct and Indirect Interest (%)
2019
2020
2021
100.0
100.0
100.0
100.0
100.0
100.0
100.0
100.0
—
100.0
100.0
—
100.0
100.0
—
100.0
100.0
—
100.0
100.0
—
100.0
100.0
100.0
51.5
51.5
51.5
51.0
51.0
—
100.0
100.0
100.0
100.0
100.0
100.0
—
14.5
11.0
25.0
100.0
100.0
37.5
56.0 *
57.4
—
100.0
100.0
—
60.0
60.0
—
—
100.0
—
—
100.0
—
—
100.0
—
—
100.0
—
—
60.0
—
—
23.4
—
—
26.1
* As of December 31, 2020 we had acquired a 56.06% corporate interest in Geekie and were already entitled to acquire up to 57.42% of its corporate interest.
For more details about our organizational structure please see "Presentation of Financial and Other Information—Organizational Structure” and refer to
notes 1 and 2.2 to our audited consolidated financial statements.
On January 1, 2020, Osterreich Investimentos - Participações Societárias S.A., Mendel Investimentos - Participações Societárias S.A., Torino
Investimentos - Participações Societárias S.A., Remare Investimentos - Participações Societárias S.A. and Fahe Investimentos - Participações Societárias S.A.
merged into Positivo and became extinct. As a result of the merger, all the contracts, rights and obligations of the now-extinct companies were transferred to
Positivo.
On August 1, 2020, Positivo and Piá, merged into CBE and became extinct. As a result of the merger, all the contracts, rights and obligations of Positivo
and Piá were transferred to CBE.
On January 1st, 2021, Arco Ventures S.A., merged into CBE and, therefore, became extinct. Due to the merger, all contracts, rights, and obligations from
Arco Ventures were transferred to CBE.
On July 1, 2021, Barra Américas, Desterro, SAS Sistema and SAS Livrarias merged into CBE and were dissolved. Due to the merger, all contracts, rights,
and obligations from Barra Américas, Desterro, SAS Sistema and SAS Livrarias were transferred to CBE.
On October 1, 2021, Nave merged into CBE and was dissolved. Due to the merger, all contracts, rights, and obligations from Nave were transferred to CBE.
In order to comply with Brazilian corporate regulation, Arce Participações Ltda. holds one (1) share of Arco Educação.
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D. Property, Plant and Equipment
Properties
Our corporate headquarters, which houses our sales, marketing, and business operations, is located in São Paulo at Rua Augusta and comprises over
4,426 square meters under 3 leases, which expire in 2023. We also lease 5,869 square meters in Fortaleza for our product development, sales, and business
operations under a lease that expires in 2025. Additionally, we lease 13,858 square meters in Curitiba, which houses Positivo’s sales, marketing, and business
operations, under a lease that expires on July 31, 2022. Also, in the city of Curitiba we lease a building that houses SAE Digital business operations, such
lease agreement expires in October 2022. We have offices in several other locations and believe our facilities are sufficient for our current needs.
In addition to our corporate headquarters and as of December 31, 2021, we leased operational, sales, distribution, and administrative facilities in Louveira,
Cajamar, São José, Curitiba, Diadema, Florianópolis, Porto Alegre, Recife, Salvador, Guarulhos, Fortaleza, Jaboatão dos Guararapes, Embu das Artes, Belo
Horizonte, São José dos Campos, Ribeirão Preto, Niterói and Simões Filho. As of December 31, 2021, we had a services agreement with a data center service
provider for the provision of data services to us from its data centers located globally, which is automatically renewed and may be terminated upon requested
by the parties, and two cloud storage agreements, one of which can be terminated at our discretion with 30 days’ notice to the service provider and the other
which the expiration date may vary on each purchase order. We believe that our facilities are suitable and adequate for our business as presently conducted,
however, we periodically review our facility requirements and may acquire new space to meet the needs of our business or consolidate and dispose of
facilities that are no longer required.
Intellectual Property
Most of our services are provided using proprietary software developed by third parties and by our employees. We rely on a combination of industrial
property, copyright, and software laws, as well as employee and third-party non-disclosure, confidentiality and other types of contractual arrangements to
protect, establish, maintain and enforce our intellectual property rights, including with respect to our proprietary rights related to our products and services.
Nevertheless, we may hold restricted rights over certain software developed either by third parties or by our current or former employees and, occasionally,
may be subject to lawsuits filed by said third parties or employees to claim ownership over each software. In addition, we license technology from third
parties, and do not hold or own licenses regarding certain software employed in the business. However, we have not received any legal notices related to
such non-licensed software and are employing measures to obtain pending licenses.
As of December 31, 2021, we own 774 trademark registrations in Brazil (573 of which have been granted and 201 of which are under review but that we are
entitled to use), 2 in Argentina, 2 in Bolivia, 1 in Chile, 1 in Ecuador, 3 in Paraguay, 2 in Venezuela, and 2 in Uruguay. As of December 31, 2021, we owned 115
registered domain names in Brazil. We also have 150 of pending trademark applications in Brazil, Paraguay and Venezuela (148 in Brazil, 1 in Paraguay and 2 in
Venezuela), as of December 31, 2021. We have several registered copyrights, most notably copyrights for text formatting, critical reading, books, drafting, text
editing and review, reformulation, book updates, content coordination, illustrations and diagramming.
ITEM 4A. UNRESOLVED STAFF COMMENTS
Not applicable.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial
Statements and the notes thereto. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results
may differ materially from those discussed in the forward-looking statements because of various factors, including those set forth in "Item 3. Key
Information—D. Risk factors.”
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A. Operating Results
We provide a complete pedagogical system with technology-enabled features to deliver educational content to private schools in Brazil.
We founded our company with the aim of creating high quality products that simplify learning and make the education process more efficient.
Traditionally, school administrators required a multitude of vendors for content development, training, commercializing, and managing K-12 education.
Simultaneously, students acquired educational content through textbooks from various publishers across retail channels. Our platform aims to replace this
multitude of third-party educational providers with a streamlined, one-stop solution that delivers high quality education at scale.
We believe the success of our platform, together with the quality of our client base and the popularity of our brand, has driven our significant growth,
allowing us to expand our footprint quickly and efficiently in Brazil.
We provide a complete suite of turnkey curriculum solutions and technology-enabled features to help our students, teachers, partner schools and
parents, targeting our students’ educational success. Our turnkey educational platform solutions consist of core K-12 curricula, as well as supplemental
instructional content currently focused on English as a second language.
As of March 31, 2022, our Core Curriculum and Supplemental B2B2C Content Solutions had 8,056 unique partner schools. These schools are spread
across 1,878 cities located across all the states of Brazil. Our partner schools base is highly diversified, which reduces our dependence on major accounts.
Our Growth
Our revenue growth has been driven by:
· Expansion of our partner school base:The increase in the number of partner schools using our educational platform. Through a sophisticated sales
process with our highly skilled sales team, we build relationships with partners schools and plant seeds for new features and products.
· Deepening of relationships with our existing customer base:The increase in the number of enrolled students we serve in our partner schools,
through (i) the increase in the number of class years that adopt our Core Curriculum solutions (upselling), and (ii) cross-selling our Supplemental
Solutions and services.
·
Price increases:The annual adjustments of our contract fees, in line with our price-setting policies which are usually above published inflation
indices, to account for changes in our cost and expenses’ structure and for improvements in our platform.
· M&A:The acquisition of complementary businesses has helped us expand our operations regionally and nationally and add new products and
technologies. This allows us to become a one-stop shop platform, which we believe further strengthens our stickiness and improves our value
proposition.
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The strength of our partner school base and our ability to expand sales are demonstrated in the increasing portion of our ACV Bookings from existing
clients and upsell in existing clients prior to the COVID-19 pandemic, represented in the chart below. During the 2020 and 2021 school years, our business was
impacted by the non-recurring drop-outs of students in partner schools, which we believe will be normalized in the upcoming years.
Revenue Recognition and Seasonality
Prior to the adoption of IFRS 15, revenue was recognized when the significant risks and rewards of ownership were transferred to the customer, recovery
of the consideration was probable, the associated costs and possible return of educational content could be estimated reliably, there was no continuing
management involvement with the educational content and the amount of revenue could be measured reliably. Upon the adoption of IFRS 15, revenue is
recognized when the performance obligation is satisfied. We recognize our revenue when we deliver our content to our partner schools in printed format or via
access to the content in our digital platform. The technology is provided solely to optimize the use of our educational content. Our printed materials can be
used independently of the technology we provide, as the content of both our printed materials and online materials is substantially the same.
We generate substantially all our revenue from contracts that have an average term of three years, pursuant to which we provide educational content in
printed and digital format to partner schools. Our revenue is driven by the number of enrolled students at each partner school using our solutions and the
agreed price per student per year, all in accordance with the terms and conditions set forth in each contract. Each contract contemplates penalties ranging
between 20% and 100% of the remaining total value of the contract in the event of termination, and the content already delivered by us through the
termination date is not returned to us by the partner school.
Our partner schools pay us our fees directly and pass that cost on to their enrolled students’ parents, who in turn are charged through a mandatory
supplement to school tuition, in lieu of paying for textbooks from several vendors. Most of our partner schools charge parents an incremental markup from
which we do not earn any additional revenue on top of our wholesale prices.
Pursuant to the terms of our contracts with our partner schools, they are required, by the end of November of each year, to provide us with an estimate of
the number of enrolled students that will access our content in the next school year (which typically starts in February of the following year). Since we allow
our partner schools to make small adjustments to their estimates to account for late admissions and dropouts, this number may fluctuate slightly until March
31, when it becomes more accurate.
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We typically deliver our Core Curriculum content four times each year in March, June, August and December and our Supplemental Solutions content
twice each year in June and December, typically two to three months prior to the start of each school quarter. This allows our partner schools and their
teachers to prepare classes in advance of each school quarter. Because we recognize revenue upon delivery of our educational content, our fourth quarter
results reflect the growth in the number of our students from one school year to another. Consequently, we generally produce higher revenues in the fourth
quarter of our fiscal year compared to the preceding quarters.
In addition, we bill partner schools and collect the sales we charge them in the first half of each academic collections year, generally resulting in a higher
cash position in the first half of each fiscal year relative to the second half of each fiscal year.
Accordingly, we expect quarterly fluctuations in our revenues and operating results to continue. These fluctuations could result in volatility and
adversely affect our liquidity and cash flows. As our business grows, these seasonal fluctuations may become more pronounced. As a result, we believe that
sequential quarterly comparisons of our financial results may not provide an accurate assessment of our financial position.
A significant portion of our expenses is also seasonal. Due to the nature of our business cycle, we require significant working capital, typically in
September and/or October of each year, to cover costs related to production and accumulation of inventory, selling and marketing expenses, and delivery of
our teaching materials at the end of each fiscal year in preparation for the beginning of each school year. Therefore, such operating expenses are generally
incurred in the period between September and December of each year.
Key Business Metrics
We review the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans
and make strategic decisions:
Operating Data
Enrolled Students
The number of enrolled students is the primary operational metric our management reviews for our B2B2C Core Curriculum and Supplemental Content
Solutions. It represents the total number of students at our partner schools served by our platform during a given school year. Although our primary
customers are the partner schools we attract to our base, our revenues are determined by the number of students enrolled in our partner schools.
We typically have high visibility of the number of students we will serve before the school year starts, typically by the end of November. Since we allow
our partner schools to make small adjustments to their estimates to account for late admissions and early dropouts, this number may fluctuate slightly until
March 31, when it becomes more accurate. Accordingly, we believe this metric is most accurately reflected as of March 31 of each year.
Following March 31 in a calendar year, our partner schools may experience additional admissions and/or dropouts up to September 30 of such year, which
is the date on which the number of students for the year becomes final, or Final Number of Students. In years prior to the COVID-19 pandemic, the difference
between the Number of Enrolled Students as of March 31 and the Final Number of Students as of September 30 was not material. However, during 2020 and
2021 and as result of the impacts of the COVID-19 pandemic, our partner schools experienced atypical dropout rates from March 31 to September 30, and our
number of students decreased from Number of Enrolled Students of 1,362,141 as of March 31, 2020, to Final Number of Enrolled Students of 1,239,937 as of
September 30, 2020, and from Number of Enrolled Students of 1,785,576 as of March 31, 2021, to Final Number of Students of 1,489,707 as of September 30,
2021.
As of March 31, 2022, we had Number of Enrolled Students of 2,279,025 , compared to the Final Number of Enrolled Students of 1,489,707 as of September
30, 2021 (and 1,785,576 Number of Enrolled Students as of March 31, 2021) and 1,362,141 and 498,553 Number of Enrolled Students as of March 31, 2020 and
2019, respectively, representing a CAGR of 66%.
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In our Core Curriculum segment, we had Number of Enrolled Students of 1,614,648 as of March 31, 2022, compared to Final Number of Enrolled Students
of 1,057,118 as of September 30, 2021 (and 1,270,463 Number of Enrolled Students as of March 31, 2021), and 1,131,691 and 413,678 Number of Enrolled
Students as of March 31, 2020 and 2019, respectively, representing a CAGR of 57%. In our Supplemental Content Solutions, we had Number of Enrolled
Students of 664,377 as of March 31, 2022, compared to Final Number of Enrolled Students of 432,589 as of September 30, 2021 (and 515,113 Number of Enrolled
Students as of March 31, 2020), and 230,450 and 84,875 Number of Enrolled Students as of March 31, 2020 and 2019, respectively, representing a CAGR of
99%.
The following table sets forth the number of enrolled students at our partner schools as of the dates indicated.
Number of Enrolled Students
Core Curriculum solutions(1)
Supplemental Content Solutions (2)
As of March 31,
2022
2,279,025
1,614,648
664,377
2021
1,785,576
1,270,463
515,113
2020
1,362,141
1,131,691
230,450
2019
498,553
413,678
84,875
(1)
Includes SAS, SAE, Positivo, Conquista, Geekie, COC and Dom Bosco.
(2)
Includes International School, PES, PGS, Escola da Inteligência, Pleno and NAV (all B2B2C solutions).
ACV Bookings
ACV Bookings is an operating metric and represents our customers’ commitment to pay for our solutions offerings. We believe that they are a meaningful
indicator of demand for our platform and the market’s response to it.
We define ACV Bookings as the revenue we would contractually expect to recognize in each school year pursuant to the terms of our contract, assuming
no further additions or reductions in the number of enrolled students that will access our content in such school year. ACV Bookings is a non-accounting
managerial operating metric and is not prepared in accordance with IFRS. We calculate ACV Bookings by multiplying the number of enrolled students with the
average ticket per student per year, all in accordance with the terms of our contract with such partner school. For our B2B2C Core Curriculum and
Supplemental Content Solutions, although our contracts with our partner schools are typically for three-year terms, we record one year of revenue under such
contracts as ACV Bookings. For example, if a school enters into a three-year contract with us to provide our Core Curriculum solution to 100 students for a
contractual fee of $100 per student per year, we record $10,000 as ACV Bookings, not $30,000.
For our B2B2C Core Curriculum and Supplemental Content Solutions, we measure our ACV Bookings monthly throughout the school year, starting in
November of the preceding fiscal year. Pursuant to the terms of our contracts with our partner schools, they are required, by the end of November of each
year, to provide us with an estimate of the number of enrolled students that will access our platform in the next school year. Since we allow our partner
schools to make small adjustments to their estimates to account for late admissions and early dropouts, this number may fluctuate slightly until March 31,
when it becomes more accurate. Accordingly, we believe this metric is most accurately reflected as of March 31 of each year, and in this annual report, we refer
to our ACV Bookings as of March 31 in each year as our ACV Bookings.
Following March 31 in a calendar year, our partner schools may experience additional admissions and/or dropouts up to September 30 of such year,
explaining the difference between the ACV Bookings and the revenue recognized for such school year. In years prior to the COVID-19 pandemic, the
difference between our ACV Bookings and the revenue recognized for the school year was not material, demonstrating the predictability of our business.
However, during 2020 and 2021 and as result of the impacts of the COVID-19 pandemic, our partner schools experienced atypical dropout rates from March 31
to September 30, and the difference
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between our ACV Bookings and the revenue recognized for each school year was -4% and -9%, respectively. Consequentially, the dynamics mentioned above
also impacted the number of enrolled students in our partner schools.
As presented in the chart above, the ACV is divided into three main parts:
-
-
-
Core Curriculum Solutions: including SAS, SAE, Positivo, Conquista, Geekie, COC and Dom Bosco, as of March 31, 2022.
Supplemental Content Solutions (B2B2C content segment): International School, PES, PGS, Escola da Inteligência, Pleno and NAV, as of March 31,
2022
Other Supplemental Solutions: WPensar, Escola em Movimento (EEM), Studos, Eduqo, Me Salva and Edupass.
The following table illustrates our ACV Bookings as of March 31, 2022, 2021, 2020 and 2019 by segment:
Core Curriculum Solutions Segment
Supplemental Content Solutions Segment (B2B2C content)
(=) B2B2C Content Solutions ACV
Other Supplemental Solutions
(=) Total ACV
2022(1)
US$(1)
221.6
52.2
273.8
2022(2)
1,236.7
291.2
1,527.9
As of March 31,
2021
2020
R$
912.8
233.8
1,146.7
803.6
196.8
1,000.4
5.8
279.5
32.1
1,560.0
16.7
1,163.4
5.3
1,005.8
2019
340.5
100.4
440.9
—
440.9
(1) For convenience purposes only, amounts in reais as of December 31, 2021, have been translated to U.S. dollars using an exchange rate of R$5.581 to
US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2021 as reported by the Central Bank. These translations should not be considered
representations that any such amounts have been, could have been or
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could be converted at that or any other exchange rate. See "—Exchange Rates” for further information about recent fluctuations in exchange rates.
(2) For the 2022 school year (which we define for purposes of ACV Bookings as the period starting in October 2021 and ending in September 2022). Includes
the ACV Bookings of COC and Dom Bosco, which were acquired in November 2021.
The following table set forth our Number of Enrolled Students, average ticket per student per year and ACV Bookings for our B2B2C Core Curriculum and
Supplemental Content Solutions as of March 31, 2022, 2021, 2020 and 2019.
As of March 31,
Number of Enrolled Students(6)
Average ticket per student per year(6)
ACV Bookings (in millions)(6)
2022(1)
US$ (except
number of
enrolled students)(1)
n/a
120.1
273.8
2022(2)
R$ (except
number of
enrolled students)
2,279,025
670.4
1,527.9
2021(3)
2020(4)
2019(5)
R$ (except number of enrolled students)
1,785,576
642.2
1,146.7
1,362,141
734.5
1,000.4
498,553
884.3
440.9
(1) For convenience purposes only, amounts in reais as of December 31, 2021, have been translated to U.S. dollars using an exchange rate of R$5.581 to
US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2021 as reported by the Central Bank. These translations should not be considered
representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See "—Exchange Rates” for
further information about recent fluctuations in exchange rates.
(2) For the 2022 school year (which we define for purposes of ACV Bookings as the period starting in October 2021 and ending in September 2022). Includes
the ACV Bookings of COC and Dom Bosco, which were acquired in November 2021.
(3) For the 2021 school year (which we define for purposes of ACV Bookings as the period starting in October 2020 and ending in September 2021).
(4) For the 2020 school year (which we define for purposes of ACV Bookings as the period starting in October 2019 and ending in September 2020). Includes
the ACV Bookings of Positivo, which was acquired in November 2019.
(5) For the 2019 school year (which we define for purposes of ACV Bookings as the period starting in October 2018 and ending in September 2019).
(6) For our Core Curriculum Solutions (SAS, SAE, Positivo, Conquista, Geekie, COC and Dom Bosco) and Supplemental Content Solutions (International
School, PES, PGS, Escola da Inteligência, Pleno and NAV).
ACV Bookings for our Core Curriculum and Supplemental Content Solutions were R$1.146.7 million as of March 31, 2021 and recognized Revenue for the
2021 school year was R$1,045.9 million.
The following table sets forth the approximate Number of Enrolled Students, average ticket per student per year and ACV Bookings for our Core
Curriculum Solutions segment for the periods presented.
As of March 31,
Number of Enrolled Students
Average ticket per student per year
ACV Bookings (in millions)
2022(1)
US$ (except
number of
enrolled students)(1)
n/a
137.2
221.6
2022(2)
R$ (except
number of
enrolled students)
1,614,648
765.9
1,236.7
74
2021(3)
2020(4)
2019(5)
R$ (except number of enrolled students)
1,270,463
718.4
912.7
1,131,691
710.1
803.6
413,678
823.0
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(1) For convenience purposes only, amounts in reais as of December 31, 2021, have been translated to U.S. dollars using an exchange rate of R$5.581 to
US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2021, as reported by the Central Bank. These translations should not be
considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See "—
Exchange Rates” for further information about recent fluctuations in exchange rates.
(2) For the 2022 school year (which we define for purposes of ACV Bookings as the period starting in October 2021 and ending in September 2022). Includes
the ACV Bookings of COC and Dom Bosco, which were acquired in November 2021.
(3) For the 2021 school year (which we define for purposes of ACV Bookings as the period starting in October 2020 and ending in September 2021).
(4) For the 2020 school year (which we define for purposes of ACV Bookings as the period starting in October 2019 and ending in September 2020). Includes
the ACV Bookings of Positivo, which we acquired in November 2019.
(5) For the 2019 school year (which we define for purposes of ACV Bookings as the period starting in October 2018 and ending in September 2019).
For our Core Curriculum Solutions segment, ACV Bookings was R$912.7 million as of March 31, 2021, and recognized Revenue for the 2021 school year
was R$841.9 million.
The following table sets forth the approximate Number of Enrolled Students, average ticket per student per year and ACV Bookings for our Supplemental
Content Solutions for the periods presented.
Number of Enrolled Students
Average ticket per student per year
ACV Bookings (in millions)
2022(1)
US$ (except
number of
enrolled
students)(1)
n/a
78.5
52.2
2022(2)
R$ (except
number of
enrolled
students)
664,377
438.4
291.2
As of March 31,
2021(3)
2020(4)
2019(5)
R$ (except number of enrolled students)
515,113
454.0
233.8
230,450
854.1
196.8
84,875
1,182.9
100.4
(1) For convenience purposes only, amounts in reais as of December 31, 2021, have been translated to U.S. dollars using an exchange rate of R$5.581 to
US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2021, as reported by the Central Bank. These translations should not be
considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See "—
Exchange Rates” for further information about recent fluctuations in exchange rates.
(2) For the 2022 school year (which we define for purposes of ACV Bookings as the period starting in October 2021 and ending in September 2022).
(3) For the 2021 school year (which we define for purposes of ACV Bookings as the period starting in October 2020 and ending in September 2021).
(4) For the 2020 school year (which we define for purposes of ACV Bookings as the period starting in October 2019 and ending in September 2020). Includes
the ACV Bookings of Positivo, which we acquired in November 2019.
(5) For the 2019 school year (which we define for purposes of ACV Bookings as the period starting in October 2018 and ending in September 2019).
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For our Supplemental Content Solutions, the ACV Bookings was R$233.8 million as of March 31, 2021, and recognized Revenue for the 2021 school year
was R$204.0 million.
Brazilian Macroeconomic Environment
We believe that our results of operations and financial performance are and will continue to be affected by the following macroeconomic trends and
factors:
All our operations are located in Brazil. As a result, our revenues and profitability are affected by political and economic developments in Brazil and the
effect that these factors have on the availability of credit, disposable income, employment rates and average wages in Brazil. Our operations, and the industry
in general, are particularly sensitive to changes in economic conditions.
Brazil is the largest economy in Latin America, as measured by gross domestic product, or GDP. The following table shows data for real GDP, inflation and
interest rates in Brazil and the U.S. dollar/real exchange rate at the dates and for the periods indicated.
Real growth (contraction) in gross domestic product
Inflation (IGP-M)(1)
Inflation (IPCA)(2)
Long-term interest rates—TJLP (average)(3)
CDI interest rate(4)
Period-end exchange rate—reais per US$1.00
Average exchange rate—reais per US$1.00(5)
Appreciation (depreciation) of the real vs. US$in the period(6)
Unemployment rate(7)
Source: FGV, IBGE, Central Bank and B3.
(1)
Inflation (IGP-M) is the general market price index measured by the FGV.
(2)
Inflation (IPCA) is a broad consumer price index measured by the IBGE.
(3) TJLP is the Brazilian long-term interest rate (average of monthly rates for the period).
For the Year Ended December 31,
2021
2020
2019
4.6 %
17.8 %
10.1 %
4.8 %
4.5 %
5.581
5.396
R$
R$
7.4 %
11.1 %
(4.1)%
23.1 %
4.5 %
4.9 %
2.8 %
5.197
5.158
(28.9)%
13.5 %
1.1 %
7.3 %
4.3 %
6.2 %
6.0 %
4.031
3.946
(4.0)%
11.9 %
R$
R$
(4) The CDI (certificado de depósito interbancário) interest rate is an average of interbank overnight rates in Brazil, average during the corresponding
period.
(5) Average of the exchange rate on each business day of the year.
(6) Comparing the US$ closing selling exchange rate as reported by the Central Bank at the end of the period’s last day with the day immediately prior to the
first day of the period discussed.
(7) Average unemployment rate for year as measured by the IBGE.
For the years ended December 31, 2021, 2020 and 2019, we have been able to offset all or most of the inflation effects by adjusting the contractual fees per
student that we charge our partner schools above the IPCA rate. Our financial performance is also tied to fluctuations in interest rates, such as the CDI rate,
because such fluctuations affect the value of our financial investments.
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Printer Costs; Raw Materials
We outsource the printing and binding of our educational materials. Printer costs are one of our principal costs; printer fees are impacted by changes in
the price of paper, one of the principal raw materials required to produce our educational materials. The cost of paper is generally impacted by fluctuations in
the U.S. dollar/real exchange rate, and is also impacted by inflation, but not necessarily linked to a specific inflation index. Such changes in prices are reflected
as inflation adjustments in the fees charged by our third-party printers, which produce our printed materials. To the extent we cannot offset the impact of
printer costs by adjusting the contractual fees per student that we charge our partner schools, our margins may be negatively affected.
Recent Accounting Pronouncements
For a discussion on recent accounting pronouncements, see note 2.4 to our audited consolidated financial statements.
Components of Our Results of Operations
The following is a summary of the principal line items comprising our statements of income (loss).
Net revenue
We generate substantially all our revenue from contracts that have a standard term from one to five years, pursuant to which we provide educational
content in printed and digital format to partner schools.
Our revenue is driven by the number of enrolled students at each partner school using our solutions and the agreed price per student per year, all in
accordance with the terms and conditions set forth in each contract. We recognize our revenue when we make our content available to our partner schools in
printed format or via access to our digital platform. We typically deliver our Core Curriculum content four times each year in March, June, August and
December and our Supplemental Solutions content twice each year in June and December, usually two to three months prior to the start of each school
quarter. This allows our partner schools and their teachers to prepare classes in advance of each school quarter.
Cost of Sales
Cost of sales primarily consists of expenses related to the production and delivery of our content and technology, which are mainly composed of printing
costs, employee-related costs, and the purchase of long-term intellectual property assets such as educational content produced by third-party authors, as well
as inventory write-off costs.
We intend to continue to invest additional resources in our content development and technology platform. The timing of these expenses will affect our
cost of sales in the affected periods. Also, we may launch new products that require additional resources and can affect our cost of sales.
Expenses
We classify our operating expenses as selling expenses, general and administrative expenses, and other expenses. The largest component of our
operating expenses is employee and labor-related expenses, which includes salaries and bonuses, employee benefit expenses and contractor costs. We
allocate expenses such as information technology infrastructure costs related to our operations and rent and occupancy charges in each expense category
based on employee headcount in that category.
● Selling Expenses. Selling expenses consist primarily of the personnel expenses of our sales and marketing and customer support employees,
including commissions and incentives, travel and travel-related expenses, benefits, marketing programs, including lead generation, costs of our
education-related conferences and other miscellaneous expenses, as well as intangible assets amortization expenses. We expect that our selling
expenses will increase as we increase the size of our sales and marketing teams and potentially increase the number of conferences and events that
we organize.
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● General and Administrative Expenses. General and administrative expenses consist of personnel expenses and related expenses, including executive,
finance, legal, human resources, recruiting, employee-related information technology, administrative personnel, payroll, and benefits. They also
consist of expenses in connection with professional fees for external legal, accounting, and other consulting services, intangible assets amortization
expenses, as well as other miscellaneous expenses. In 2021, general and administrative expenses decreased on an absolute real basis as part of our
recent integration efforts. Going forward, we expect general and administrative expenses to increase on an absolute real basis but decrease as a
percentage of total revenue as we continue to focus on processes, systems and controls that will enable our internal support functions to grow
concurrently with the growth of our business. We also anticipate increases to general and administrative expenses as we incur the expenses of
compliance associated with being a publicly traded company, including legal, audit and consulting fees.
We allocate share-based payment expense to general and administrative expenses. These share-based expenses represent granted restricted shares to
selected employees we consider to be key executives. We recognize our share-based payments as an expense in the statement of income based on their fair
value over the vesting period. These charges have been significant in the past, and we expect that they will increase as we hire more employees and seek to
retain existing employees.
Other Income (Expenses), Net
Our other income (expenses), net, line item consists mainly of miscellaneous income and/or expense items.
Finance Result
Our finance result includes finance income and finance costs.
Finance income includes mainly income from cash equivalents and financial investments, changes in fair value of derivative instruments from business
combinations and acquisition of interest in associates and joint ventures. Finance costs consist mainly of changes in fair value of derivatives instruments,
changes in accounts payable to selling shareholders, interest expenses in acquisition of investment, interest expenses on loans and financing, interest
expenses in lease liabilities and other financial discounts.
Income Taxes
Income taxes include current and deferred income taxes. Deferred tax expenses are mainly related to tax losses carryforward, provisions for bonuses,
inventories reserve, allowance for doubtful accounts, share-based compensation plan, intangible amortization and derivatives from acquisition of interests
and business combinations.
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Results of Operations
Year Ended December 31, 2021, compared to the Year Ended December 31, 2020
The following table sets forth our consolidated statements of income (loss) for the years ended December 31, 2021, and 2020:
Statement of Income Data:
Net revenue
Core(1)
Supplemental(1)
Cost of sales
Gross profit
Selling expenses
General and administrative expenses
Other income (expenses), net
Operating profit
Finance income
Finance costs
Finance result
Share of (loss) profit of equity-accounted investees
(Loss) profit before income taxes
Income taxes—income (expense)
Current
Deferred
(Loss) profit for the year
(Loss) profit attributable to:
Equity holders of the parent
For the Year Ended December 31,
2021
2020
(in R$millions, except for percentages)
Variation
1,232.1
936.0
296.1
(294.4)
937.7
(496.3)
(328.7)
16.7
129.4
91.2
(372.1)
(280.9)
(22.2)
(173.7)
15.6
(65.6)
81.2
(158.1)
1,001.7
841.1
160.6
(221.1)
780.6
(372.3)
(270.6)
(2.2)
135.5
45.2
(142.0)
(96.8)
0.4
39.1
(22.3)
(87.4)
65.1
16.8
23.0 %
11.3 %
84.4 %
33.2 %
20.1 %
33.3 %
21.5 %
(859.1)%
(4.5)%
101.8 %
162.0 %
190.2 %
n/a
(544.2)%
(170.0)%
(24.9)%
24.7 %
n/a
(158.1)
16.8
n/a
(1) Our operating segments consist of our Core segment and our Supplemental segment. For further information, see note 25 to our audited consolidated
financial statements.
Net Revenue
Net revenue for the year ended December 31, 2021, was R$1,232.1 million, an increase of R$230.4 million, or 23.0%, from R$1,001.7 million for the year
ended December 31, 2020.
This increase was primarily attributable to:
(ii)
in the fourth quarter of 2021, the positive impact of our organic growth through the addition of new partner schools and upsell within our solutions,
which resulted in a 28% increase in the Number of Enrolled Students for 2022 at our partner schools to 2,279,025 as of March 31, 2022, from the
Number of Enrolled Students of 1,785,576 as of March 31, 2021; and
(iii) the addition of new solutions to the portfolio, such as Me Salva!, Eduqo, Edupass, COC and Dom Bosco, all acquired in 2021.
This increase partially offset by the negative impact of student drop outs in our partner schools in the first three quarters of 2021, which led to a lower
than expected revenue recognition for the period.
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In our Core segment, net revenue for the year ended December 31, 2021, was R$936.0 million, an increase of R$94.9 million, or 11.3%, from R$841.1 million
for the year ended December 31, 2020. This increase was primarily attributable to the successful commercial cycle for the 2022 school year, translating into a
strong fourth quarter, and the acquisition of COC and Dom Bosco core brands from Pearson.
In our Supplemental segment, net revenue for the year ended December 31, 2021 was R$296.1 million, an increase of R$135.5 million, or 84.4% from R$160.6
million for the year ended December 31, 2020. This increase was primarily attributable to organic growth and the acquisition of new companies in 2021.
Cost of Sales
Cost of sales for the year ended December 31, 2021, was R$294.4 million, an increase of R$73.3 million, or 33.2%, from R$221.1 million for the year ended
December 31, 2020. This increase was primarily attributable to the overall increase in the production volume of our educational materials, resulting from the
positive impact of our organic growth. The increase in cost of sales was higher than our revenue growth due to new solutions in our base with lower gross
margin.
As a percentage of net revenue, our cost of sales increased to 23.9% for the year ended December 31, 2021, compared to 22.1% for the year ended
December 31, 2020.
In our Core segment, cost of sales for the year ended December 31, 2021, was R$228.5 million, an increase of R$37.6 million, or 19.7%, from R$190.9 million
for the year ended December 31, 2020. As mentioned above, this increase was primarily attributable to the overall increase in the production volume of our
educational materials, resulting from the positive impact of our organic growth and mix of solutions. As a percentage of net revenue in our Core segment, cost
of sales increased to 24.4% in the year ended December 31, 2021, compared to 22.7% in the year ended December 31, 2020.
In our Supplemental segment, cost of sales for the year ended December 31, 2021, was R$65.9 million, an increase of R$35.7 million, or 118.2% from R$30.2
million for the year ended December 31, 2020. This increase was primarily attributable to the overall increase in the production volume of our educational
materials, resulting from the positive impact of our organic growth and the addition of our supplemental solutions in our portfolio. As a percentage of net
revenue in our Supplemental segment, cost of sales increased to 22.3% in the year ended December 31, 2021, compared to 18.8% in the year ended December
31, 2020.
Gross Profit
For the reasons discussed above, gross profit for the year ended December 31, 2021, was R$937.7 million, an increase of R$157.1 million, or 20.1%, from
R$780.6 million for the year ended December 31, 2020. In our Core segment, gross profit for the year ended December 31, 2021, was R$707.5 million, an increase
of R$57.4 million, or 8.8%, from R$650.2 million for the year ended December 31, 2020. In our Supplemental segment, gross profit for the year ended December
31, 2021, was R$230.2 million, an increase of R$99.8 million or 76.5%, from R$130.4 million for the year ended December 31, 2020.
Selling Expenses
Selling expenses for the year ended December 31, 2021, were R$496.3 million, an increase of R$124.0 million, or 33.3%, from R$372.3 million for the year
ended December 31, 2020. This increase was primarily attributable to:
(i)
a R$42.8 million, or 25.6%, increase in sales personnel expenses, mainly attributable to new brands in our portfolio and the increase in the number
of employees in our educational and pedagogical consulting teams to support our growth strategy going forward;
(ii) a R$35.3 million, or 65.5%, increase in customer support expenses due to new brands in our portfolio and continuous investments for customer
satisfaction, which increases as our school base grows;
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(iii) a R$22.1 million, or 28.6%, increase in depreciation and amortization expenses, mainly due the amortization of intangible assets acquired from
business combinations in 2021 and in the last quarter of 2020;
(iv) a R$22.7 million, or 94.1%, increase in sales & marketing expenses, the increase was mainly attributable to and increase in travel and events,
which resumed in the second half of 2021 following travel and events restrictions related to COVID-19 pandemic during 2020 and the first half of
2021.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2021, were R$328.6 million, an increase of R$58.1 million, or 21.5%, from R$270.6
million for the year ended December 31, 2020. This increase was primarily attributable to:
(ii) a R$22.2 million increase in corporate personnel expenses totaling R$96.6 million for the year ended December 31, 2021, due to the 29.1% increase in
the number of employees in our general administrative team, to 563 employees as of December 31, 2021, from 436 employees as of December 31, 2020;
and
(ii) a R$24.4 million increase in depreciation and amortization totaling R$39.6 million for the year ended December 31, 2021, mainly due to (i) depreciation
and amortization of IT equipment acquired by Geekie,; (ii) amortization of intangible assets acquired during the year through a business combination;
and (iii) amortization of licenses and software acquired for the development of new projects.
(iii) a R$18.4 million increase in share-based compensation plan totaling R$88.2 million for the year ended December 31, 2021, from R$69.8 million for the
year ended December 31, 2020.
Operating Profit
For the reasons discussed above, operating profit for the year ended December 31, 2021, was R$129.4 million, a decrease of R$6.1 million, or 4.5%, from
R$135.5 million for the year ended December 31, 2020.
Finance Result
Finance result for the year ended December 31, 2021, was a net finance cost of R$280.9 million, an increase of R$184.1 million, from a net finance cost of
R$96.8 million for the year ended December 31, 2020, for the reasons described below.
Finance income. Finance income for the year ended December 31, 2021, was R$91.2 million, an increase of R$46.0 million, or 101.8%, from R$45.2 million
for the year ended December 31, 2020. This increase was mainly attributable to the interest from financial investments.
Finance costs. Finance costs for the year ended December 31, 2021, was R$372.1 million, an increase of R$230.1 million, from R$142.0 million for the year
ended December 31, 2020. This increase was primarily attributable to increase of (i) changes in accounts payable to selling shareholders and interest on
acquisition of investments as described in note 17 of our consolidated financial statements; (ii) interest on loans and financing; (iii) changes in fair value of
derivative instruments; and (iv) foreign exchange loss.
Share of Profit (Loss) of Equity-Accounted Investees
Share of profit (loss) of equity-accounted investees for the year ended December 31, 2021, was a loss of R$22.2 million, as compared to a profit of R$0.4
million for the year ended December 31, 2020, attributable to the performance of our equity-accounted investees.
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(Loss) Profit before Income Taxes
For the reasons discussed above, for the year ended December 31, 2021, we recorded a loss before income taxes of R$173.7 million compared to a profit of
R$39.1 million for the year ended December 31, 2020.
Income Taxes – Income (Expense)
For the year ended December 31, 2021, we recorded an income tax credit of R$15.6 million compared to an income tax expense of R$22.3 million for the year
ended December 31, 2020. The income tax credit in 2021 was mainly attributable to: (i) reduction of current tax due to the incorporation of companies by CBE,
which is operating at a loss, resulting in a 0 tax liability and (ii) the recognition of deferred tax credits over fiscal loss.
(Loss) Profit for the Year
As a result of the foregoing, loss for the year ended December 31, 2021, was R$158.1 million compared to a profit of R$16.8 million for the year ended
December 31, 2020.
Year Ended December 31, 2020, compared to the Year Ended December 31, 2019
The following table sets forth our consolidated statements of income (loss) for the years ended December 31, 2020, and 2019:
Statement of Income Data:
Net revenue
Core(1)
Supplemental(1)
Cost of sales
Gross profit
Selling expenses
General and administrative expenses
Other income (expenses), net
Operating profit
Finance income
Finance costs
Finance result
Share of profit (loss) of equity-accounted investees
Profit (loss) before income taxes
Income taxes—income (expense)
Current
Deferred
Profit (loss) for the year
Profit (loss) attributable to:
Equity holders of the parent
Non-controlling interests
2020
For the Year Ended December 31,
2019
(in R$millions, except for percentages)
Variation
1,001.7
841.1
160.6
(221.1)
780.6
(372.3)
(270.6)
(2.2)
135.5
45.2
(142.0)
(96.8)
0.4
39.1
(22.3)
(87.4)
65.1
16.8
16.8
—
572.8
433.3
139.5
(117.3)
455.5
(199.8)
(191.4)
(6.2)
58.1
72.0
(170.8)
(98.8)
(1.8)
(42.5)
33.1
(46.9)
80.0
(9.4)
(9.4)
—
74.9 %
94.1 %
15.1 %
88.5 %
71.4 %
86.3 %
41.4 %
(62.9)%
133.2 %
(37.2)%
(16.9)%
(2.0)%
(122.2)%
(192.0)%
(167.4)%
86.4 %
(18.6)%
(278.7)%
(278.7)%
—
(1) Our operating segments consist of our Core segment and our Supplemental segment. For further information, see note 25 to our audited consolidated
financial statements.
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Net Revenue
Net revenue for the year ended December 31, 2020, was R$1,001.7 million, an increase of R$428.9 million, or 74.9%, from R$572.8 million for the year ended
December 31, 2019.
This increase was primarily attributable to:
(i)
(ii)
the acquisition of Positivo on November 1, 2019, which contributed 710,705 students to our total student base, with an average ticket per student per
year of R$579.0 at the time of the acquisition;
in the first three quarters of 2020, the positive impact of our organic growth through the addition of new partner schools and an increase in up-sales
of our solutions, which resulted in a 30.7% increase in the total number of students enrolled at our partner schools (excluding Positivo), to the Final
Number of Enrolled Students of 1,239,937 as of September 30, 2020, from Number of Enrolled Students of 498,553 students as of March 31, 2019;
(iii) in the fourth quarter of 2020, the positive impact of our organic growth through the addition of new partner schools and an increase in up-sales of
our solutions, which resulted in a 44.1% increase in the Number of Enrolled Students for 2021 at our partner schools to 1,785,576 as of March 31,
2021, from the Final Number of Enrolled Students of 1,239,937 as of September 30, 2020; and
In our Core segment, net revenue for the year ended December 31, 2020, was R$841.1 million, an increase of R$407.8 million, or 94.1%, from R$433.3 million
for the year ended December 31, 2019.
This increase was primarily attributable to:
(i) the acquisition of Positivo on November 1, 2019, adding two Core brands to the portfolio, Sistema Positivo de Ensino and Conquista;
(ii) the 5.1% increase in the number of enrolled students at partner schools (excluding Positivo), to the Final Number of Enrolled Students of 434.969 as of
September 30, 2020, from the Number of Enrolled Students of 413,678 as of March 31, 2019, which impacted the first three quarters of 2020, combined
with the 23.1% increase in the Number of Enrolled Students to 1,270,463 as of March 31, 2021, compared to the Final Number of Enrolled Students of
1,032,029 as of September 30, 2020, which impacted the fourth quarter of 2020; and
In our Supplemental segment, net revenue for the year ended December 31, 2020, was R$160.6 million, an increase of R$21.1 million, or 15.1% from R$139.5
million for the year ended December 31, 2019.
This increase was primarily attributable to the acquisition of Positivo on November 1, 2019, adding one ESL solution, PES, and the 86.4% increase in the
number of enrolled students at partner schools (excluding Positivo), to the Final Number of Enrolled Students of 207,908(158,247 excluding Positivo
supplemental solutions) as of September 30, 2020, from the Number of Enrolled Students of 84,875 as of March 31, 2019, and the addition of new supplemental
solutions to our portfolio.
Cost of Sales
Cost of sales for the year ended December 31, 2020, was R$221.1 million, an increase of R$103.8 million, or 88.5%, from R$117.3 million for the year ended
December 31, 2019. This increase was primarily attributable to the overall increase in the production volume of our educational materials, resulting from the
positive impact of our organic growth. The increase in cost of sales was higher than our revenue growth due to new solutions in our base with lower gross
margin.
As a percentage of net revenue, our cost of sales increased to 22.1% for the year ended December 31, 2020, compared to 20.5% for the year ended
December 31, 2019.
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In our Core segment, cost of sales for the year ended December 31, 2020, was R$190.9 million, an increase of R$93.4 million, or 95.8%, from R$97.5 million
for the year ended December 31, 2019. As mentioned above, this increase was primarily attributable to the overall increase in the production volume of our
educational materials, resulting from the positive impact of our organic growth and mix of solutions. As a percentage of net revenue in our Core segment, cost
of sales increased to 22.7% in the year ended December 31, 2020, compared to 22.5% in the year ended December 31, 2019.
In our Supplemental segment, cost of sales for the year ended December 31, 2020, was R$30.2 million, an increase of R$10.5 million, or 53.3% from R$19.7
million for the year ended December 31, 2019. This increase was also primarily attributable to the overall increase in the production volume of our educational
materials, resulting from the positive impact of our organic growth and the addition of our supplemental solutions in our portfolio. As a percentage of net
revenue in our Supplemental segment, cost of sales increased to 18.8% in the year ended December 31, 2020, compared to 14.1% in the year ended December
31, 2019.
Gross Profit
For the reasons discussed above, gross profit for the year ended December 31, 2020, was R$780.6 million, an increase of R$325.1 million, or 71.4%, from
R$455.5 million for the year ended December 31, 2019. In our Core segment, gross profit for the year ended December 31, 2020, was R$650.2 million, an increase
of R$314.4 million, or 93.6%, from R$335.8 million for the year ended December 31, 2019. In our Supplemental segment, gross profit for the year ended
December 31, 2020, was R$130.4 million, an increase of R$10.6 million or 8.8%, from R$119.8 million for the year ended December 31, 2019.
Selling Expenses
Selling expenses for the year ended December 31, 2020, were R$372.3 million, an increase of R$172.5 million, or 86.3%, from R$199.8 million for the year
ended December 31, 2019. This increase/decrease was primarily attributable to:
(i) a R$79.9 million, or 91.5%, increase in sales personnel expenses, mainly attributable to new brands in our portfolio and the increase in the number of
employees in our educational and pedagogical consulting teams to support our growth strategy going forward;
(ii) a R$23.1 million, or 75.2%, increase in customer support expenses due to new brands in our portfolio and continuous investments for customer
satisfaction, which increases as our school base grows;
(iii) a R$53.8 million, or 228.1%, increase in depreciation and amortization expenses, mainly due to the acquisition of Positivo and Escola da Inteligência,
which includes their trademarks, and customer relationship and educational systems; and
(iv) a R$7.1 million, or 22.8%, decrease in sales & marketing expenses, despite the increase of brands in our portfolio, the decrease was mainly attributable
to travel and events restrictions related to COVID-19 pandemic.
General and Administrative Expenses
General and administrative expenses for the year ended December 31, 2020, were R$270.6 million, an increase of R$79.2 million, or 41.4%, from R$191.4
million for the year ended December 31, 2019. This increase was primarily attributable to:
(i) a R$21.0 million increase in corporate personnel expenses totaling R$74.4 million for the year ended December 31, 2020, due to the 13.0% increase in
the number of employees in our general administrative team, to 436 employees as of December 31, 2020, from 355 employees as of December 31, 2019;
and
(ii) a R$36.8 million increase in third-party services expenses totaling R$80.3 million for the year ended December 31, 2020, attributable to expenses
relating to (i) the acquisition of new brands; (ii) services related to M&A acquisitions; and (iii) non-recurring legal and consulting services, including
related to SOX implementation.
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Operating Profit
For the reasons discussed above, operating profit for the year ended December 31, 2020, was R$135.5 million, an increase of R$77.4 million, or 133.2%,
from R$58.1 million for the year ended December 31, 2019.
Finance Result
Finance result for the year ended December 31, 2020, was a net finance cost of R$96.8 million, a decrease of R$2.0 million, from a net finance cost of R$98.8
million for the year ended December 31, 2019, for the reasons described below.
Finance income. Finance income for the year ended December 31, 2020, was R$45.2 million, a decrease of R$26.8 million, or 37.2%, from R$72.0 million for
the year ended December 31, 2019. This decrease was mainly attributable to the interest from financial investments.
Finance costs. Finance costs for the year ended December 31, 2020, was R$142.0 million, a decrease of R$28.8 million, from R$170.8 million for the year
ended December 31, 2019. This decrease was primarily attributable to the effects of changes in fair value of accounts payable to selling shareholders
(International School acquisition debt), which decreased R$69.1 million, while the interest in acquisition of investments (mainly International School and
Position acquisitions debt) had an increased impact of R$26.2 million.
Share of Profit (Loss) of Equity-Accounted Investees
Share of profit (loss) of equity-accounted investees for the year ended December 31, 2020, was a profit of R$0.4 million, as compared to a loss of R$1.8
million for the year ended December 31, 2019, attributable to the performance of our equity-accounted investees.
Profit (Loss) before Income Taxes
For the reasons discussed above, for the year ended December 31, 2020, we recorded a profit before income taxes of R$39.1 million compared to a loss of
R$42.5 million for the year ended December 31, 2019.
Income Taxes – Income (Expense)
For the year ended December 31, 2020, we recorded an income tax expense of R$22.3 million compared to an income tax credit of R$33.1 million for the year
ended December 31, 2019. This income tax credit in 2019 was mainly attributable to the recognition of deferred tax credits over financial instruments from
acquisition of interests.
Profit (Loss) for the Year
As a result of the foregoing, profit for the year ended December 31, 2020, was R$16.8 million compared to a loss of R$9.4 million for the year ended
December 31, 2019.
Non-GAAP Financial Measures
Adjusted EBITDA, Adjusted Net Income and Free Cash Flow
Adjusted EBITDA(2)
Adjusted Net Income(3)
Free Cash Flow(4)
85
2021
US$ millions(1)
For the Year Ended December 31,
2021
2020
2019
2018
77.2
23.9
(33.5)
R$ millions
430.9
132.9
(186.9)
381.1
220.3
(15.2)
209.4
169.6
(61.7)
142.0
112.3
55.9
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(1) For convenience purposes only, amounts in reais as of December 31, 2021, have been translated to U.S. dollars using an exchange rate of R$5.581 to
US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2021, as reported by the Central Bank. These translations should not be
considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See "—
Exchange Rates” for further information about recent fluctuations in exchange rates.
(2) For a reconciliation between our Adjusted EBITDA and our profit for the year, see "—Reconciliations for Non-GAAP Financial Measures—
Reconciliation between Adjusted EBITDA and Profit for the Year.”
(3) For a reconciliation of our Adjusted Net Income, see "—Reconciliations for Non-GAAP Financial Measures—Reconciliation of Adjusted Net Income
from Profit (Loss) for the Year.”
(4) For a reconciliation of our Free Cash Flow, see "—Reconciliations for Non-GAAP Financial Measures—Reconciliation of Free Cash Flow from Net Cash
Flows from Operating Activities.”
Reconciliations for Non-GAAP Financial Measures
The following tables set forth reconciliations of Adjusted EBITDA and Adjusted Net Income to our profit (loss) for the years ended December 31, 2021,
2020, 2019 and 2018, our most recent directly comparable financial measures calculated and presented in accordance with IFRS, as well as reconciliations
between Free Cash Flow and net cash flows from operating activities for the years ended December 31, 2021, 2020, 2019 and 2018, our most recent directly
comparable financial measures calculated and presented in accordance with IFRS. For further information on why our management chooses to use these non-
GAAP financial measures, and on the limits of using these non-GAAP financial measures, please see "Presentation of Financial and Other Information—
Special Note Regarding Non-GAAP Financial Measures.”
Reconciliation between Adjusted EBITDA and Profit for the Year
Adjusted EBITDA Reconciliation
Profit (loss) for the year
(+/-) Income taxes benefit (expense)
(+/-) Finance result
(+) Depreciation and amortization
(+) Share of loss of equity-accounted investees
(+) Share-based compensation plan
(+) M&A expenses(2)
(+) Non-recurring expenses(3)
(+) Effects related to COVID-19 pandemic(4)
Adjusted EBITDA
For the Year Ended December 31,
2021
US$ millions(1)
2021
2020
2019
R$ millions
(28.3)
(2.8)
50.3
34.9
4.0
15.8
2.9
0.1
0.4
77.3
(158.1)
(15.6)
280.9
194.9
22.2
87.8
16.1
0.6
2.1
430.9
16.8
22.3
96.8
127.5
(0.4)
69.8
13.8
19.5
15.0
381.1
(9.4)
(33.1)
98.8
48.3
1.8
67.0
28.9
7.1
—
209.4
2018
(82.9)
(18.0)
162.2
19.6
0.8
60.3
—
—
—
142.0
(1) For convenience purposes only, amounts in reais as of December 31, 2021, have been translated to U.S. dollars using an exchange rate of R$5.581 to
US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2021, as reported by the Central Bank. These translations should not be
considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See "—
Exchange Rates” for further information about recent fluctuations in exchange rates.
(2) M&A expenses corresponds to the non-recurring expenses related to the acquisitions of the year, such as consulting and legal services (including
International School arbitration legal services)
(3) Non-recurring expenses are related to consulting expenses for Sarbanes-Oxley (SOX) first year implementation.
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(4) Expenses related to the COVID-19 pandemic, which include mainly expenses related to health care in food and emotional health programs offered to the
Company’s employees.
Reconciliation of Adjusted Net Income from Profit (Loss) for the Year
Reconciliation of Adjusted Net Income
Profit (loss) for the year
(+) Share-based compensation plan, restricted stock units and related payroll taxes
(restricted stock units)
(+) Amortization of intangible assets from business combinations(2)
(+/-) Changes in fair value of derivative instruments(3)
(+/-) Changes in fair value of derivative instruments – convertible notes (4)
(+/-) Changes in accounts payable to selling shareholders(5)
(+) Share of loss of equity-accounted investees
(+) Foreign exchange effects on cash and cash equivalents
(+) Interest income (expenses), net(6)
(+/-) Tax effects(7)
(+) M&A expenses(8)
(+) Non-recurring expenses(9)
(+) Effects related to COVID-19 pandemic(10)
Adjusted Net Income(11)
For the Year Ended December 31,
2021
US$ millions(1)
2021
2020
2019
R$ millions
2018
(28.3)
(158.1)
16.8
(9.4)
(82.9)
15.8
18.5
(0.2)
7.2
15.7
—
—
12.8
(21.0)
2.9
0.1
0.4
23.9
87.8
103.2
(0.9)
40.1
87.8
—
—
71.4
(117.2)
16.1
0.6
2.1
132.9
69.8
76.1
(0.6)
—
20.3
(0.4)
(0.2)
67.1
(76.9)
13.8
19.5
15.0
220.3
67.0
23.1
(0.5)
—
89.4
1.8
0.6
41.2
(79.6)
28.9
7.1
—
169.6
60.3
11.8
(0.7)
—
130.4
0.8
34.4
9.8
(51.5)
—
—
—
112.3
(1) For convenience purposes only, amounts in reais as of December 31, 2021, have been translated to U.S. dollars using an exchange rate of R$5.581 to
US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2021, as reported by the Central Bank. These translations should not be
considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See "—
Exchange Rates” for further information about recent fluctuations in exchange rates.
(2) Refers to the amortization of the following intangible assets from business combinations: (i) rights on contracts, (ii) customer relationships, (iii)
educational system, (iv) trademarks, (v) non-compete agreement and (vi) software resulting from acquisitions. For further information, see note 14 to our
audited consolidated financial statements.
(3) Refers to (i) changes in fair value of derivative instruments—finance income, plus (ii) changes in fair value of derivative instruments—finance costs. For
further information, see note 22 to our audited consolidated financial statements.
(4) Refers to changes in fair value of derivative instruments from put option to convert senior notes. For further information, see note 23 to our audited
consolidated financial statements.
(5) Refers to changes in fair value of contingent consideration and accounts payable to selling shareholders—finance costs. For further information, see
note 17 to our audited consolidated financial statements.
(6) Refers to interest expenses related to accounts payable to selling shareholders from business combinations.
(7) Refers to tax effects of current and deferred tax recognized in statements of income applied to all adjustments to net income (which refers to tax effects of
changes in deferred tax assets and liabilities recognized in profit or loss corresponding to financial instruments from acquisition of interests, tax benefit
from tax deductible goodwill, share-based compensation and amortization of intangible assets).
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(8) M&A expenses corresponds to the non-recurring expenses related to the acquisitions of the year, such as consulting and legal services (including
International School arbitration legal services).
(9) Non-recurring expenses are related to consulting expenses for Sarbanes-Oxley (SOX) first year implementation.
(10) Expenses related to the COVID-19 pandemic.
(11) Adjusted net income reflects the adjusted result of the business, excluding the effects of the special items described above. For purposes of the
calculation of Adjusted Net Income for the year ended December 31, 2021, we have excluded the following adjustments that we applied to the calculation
of Adjusted Net Income for prior periods: (i) Foreign exchange effects on cash and cash equivalents; (ii) share of loss of equity-accounted investees and
(iii) Interest income (expenses) linked to a fixed rate (we will maintain the adjustment for Interest income (expenses) that refers to adjustments by fair
value). These adjustments will not be applied to the calculation of Adjusted Net Income going forward. We believe that eliminating these adjustments
from our calculation of Adjusted Net Income for the year ended December 31, 2021 and going forward does not impact our investors’ ability to assess our
results of operations. We have not retroactively restated Net Adjusted Income for the periods prior to 2021.
Reconciliation of Free Cash Flow from Net Cash Flows from Operating Activities
Reconciliation of Free Cash Flow
Net cash flows generated from (used in) operating activities
Acquisition of property and equipment
Acquisition of intangible assets
Free Cash Flow
2021
US$millions(1)
For the Year Ended December 31,
2021
2020
2019
2018
R$millions
4.4
(10.8)
(27.1)
(33.5)
24.5
(60.1)
(151.3)
(186.9)
92.4
(10.8)
(96.8)
(15.2)
(7.6)
(11.0)
(43.1)
(61.7)
92.1
(6.9)
(29.4)
55.9
(1) For convenience purposes only, amounts in reais as of December 31, 2021, have been translated to U.S. dollars using an exchange rate of R$5.581 to
US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2021, as reported by the Central Bank. These translations should not be
considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See "—
Exchange Rates” for further information about recent fluctuations in exchange rates.
B. Liquidity and Capital Resources
As of December 31, 2021, we had R$1,184.4 million in cash and cash equivalents and financial investments (current). We believe that our current available
cash and cash equivalents and financial investments and the cash flows from our operating activities will be sufficient to meet our working capital
requirements and capital expenditures in the ordinary course of business for the next 12 months.
The following discussion of our liquidity and capital resources is based on the financial information derived from the audited consolidated financial
statements included elsewhere in this annual report.
Cash Flows
Cash Flow Data
Net cash flows generated from (used in) operating activities
Net cash flows used in investing activities
Net cash flows generated from financing activities
2021
For the Year Ended December 31,
2020
(in thousands of reais)
2019
24,496
(1,493,992)
1,243,458
92,351
(479,676)
762,647
(7,615)
(631,442)
676,211
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Operating Activities
We recorded net cash flows generated from operating activities of R$24.5 million in 2021, compared to net cash flows generated from operating activities
of R$92.4 million in 2020. In 2021, our net cash flows generated from operating activities were affected by: (i) adjustments for changes in our operating assets
and liabilities amounted to a negative cash flow of R$299.1 million mainly due to R$184.5 million of accounts receivable, R$62.9 million of other assets which
consists primarily of prepaid expenses, and R$62.2 million of inventories; and (ii) we paid income tax and social contribution in cash totaling R$72.6 million,
R$20.3 million of interest paid on loans and financing and R$13.7 million of interest paid on accounts payable to selling shareholders.
We recorded net cash flows generated from operating activities of R$92.4 million in 2020, compared to net cash flows used in operating activities of R$7.6
million in 2019. In 2020, our net cash flows generated from operating activities were affected by the impact of our organic growth through the acquisition of
new companies, in addition to adding new partner schools and an increase in up-sales of our solutions during the period.
Investing Activities
Our net cash used in investing activities was R$1,494.0 million in the year ended December 31, 2021, compared to net cash used in investing activities of
R$479.7 million in the year ended December 31, 2020, primarily due to the net impact of purchases (maturities) of financial investments of R$265.1 million and
cash paid for the acquisition of subsidiaries during the year of R$897.2 million, cash paid for additional investments and interests in other companies of
R$125.2 million, and cash paid for the acquisition of property and equipment and intangible assets of R$211.4 million.
Our net cash used in investing activities was R$479.7 million in the year ended December 31, 2020, compared to net cash used in investing activities of
R$631.4 million in the year ended December 31, 2019, primarily due to the impact of the purchase of financial investments of R$130.1 million and the amount
paid in acquisition of subsidiaries during this year of R$204.3 million.
Financing Activities
Our net cash flows generated from financing activities for the year ended December 31, 2021, was R$1,243.5 million, compared to R$762.6 million in the
year December 31, 2020, primarily due to borrowings to finance the acquisition of subsidiaries of R$1,468.5 million and cash paid to repurchase the Company’s
shares pursuant to the Share Repurchase Program of R$200.8 million.
Our net cash flows generated from financing activities for the year ended December 31, 2020, was R$762.6 million, compared to R$676.2 million in the year
December 31, 2019, primarily due to net proceeds from public offerings, which in 2020 was R$ 591.9 million and in 2019 was R$589.6 million. Additionally, in
2020 we received R$498.4 million from loans and financing, and R$97.6 million in 2019.
Indebtedness
As of December 31, 2021, our total outstanding indebtedness was R$1,831.3 million.
On December 1, 2021, we issued US$150 million in senior notes convertible into our Class A common shares (US$100 million to Dragoneer, and US$50
million to General Atlantic), bearing interest at 8% per annum in fixed Brazilian reais and maturing on November 15, 2028. Each note will be convertible at the
option of the holder into our Class A common shares at the agreed conversion rate, which is equivalent to an initial conversion price of US$29 per share. The
conversion price represents an approximately 65% premium to the trailing 30-day volume-weighted share price at the time of signing the investment
agreements for the convertible notes. Dragoneer and General Atlantic will beneficially own approximately 5.6% and 2.8%, respectively, of our total shares (on
an as converted basis for the convertible senior notes).
On November 11, 2021, Arco Educação, acting as guarantor, entered into an international loan agreement with Itaú Unibanco Nassau Branch, as lender,
and Geekie, as borrower, in the amount of US$11.0 million. The loan accrues interest at a rate equal to 2.452% per annum and is repayable in equal quarterly
installments from February 10, 2022, to October 28, 2024. We contracted swap
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derivatives financial instruments to protect our exposure to the foreign currency risk, which changes the effective interest rate for this loan to 100% of the CDI
rate + 1.7% per annum.
On August 25, 2021, we issued through our wholly owned subsidiary, Companhia Brasileira de Educação e Sistemas de Ensino S.A., R$900 million in
debentures, bearing interest at the CDI rate plus 1.7% per annum and maturing on August 25, 2023.
On January 1, 2021, CBE acting as guarantor, entered into a lease agreement with HP Financial Services Arrendamento Mercantil S.A. and Geekie. In
addition, on April 1, 2021, Arco Educação, acting as guarantor, entered into a lease agreement with HP Financial Services Arrendamento Mercantil S.A. and
Geekie.
On July 1, 2020, we entered into a loan agreement with Banco Santander (Brasil) S.A. in the amount of R$100.0 million. The loan accrues interest at a rate
equal to 100% of the CDI rate plus 2.7% per annum. The loan was repaid in December 2021.
On July 1, 2020, we entered into two loan agreements with Itaú Unibanco S.A. in the amount of R$100.0 million each, both loans maturing in January 2022
(single installment). The loans accrue interest at a rate equal to 100% of the CDI rate plus 2.7% per annum, payable in 17 installments, and were repaid in full
on January 3, 2022.
As collateral for the payment of the remaining purchase price of Positivo Acquisition, on October 25, 2018, we have entered a bank guarantee with Banco
Bradesco S.A. In accordance with the terms of such bank guarantee, 100% of the shares held by Arco Brazil in SAE and 20% of the shares held by Arco Brazil
in CBE were assigned in guarantee (alienação fiduciária) to Banco Bradesco S.A.
On November 13, 2018, we have entered into a fiduciary agreement with Banco Safra S.A., as amended on December 3, 2020, to guarantee the payment
due under the lease agreements of our São Paulo offices located at Rua Augusta 2840. For further information, see note 13 to our audited consolidated
financial statements.
Off-balance sheet arrangements
As of December 31, 2021, we did not have any off-balance sheet arrangements.
Capital Expenditures
In the years ended December 31, 2021, 2020 and 2019 we made capital expenditures of R$211.4 million, R$107.6 million and R$54.1 million, respectively.
These capital expenditures mainly include expenditures related to the acquisition of property and equipment and the acquisition of intangible assets. Our
capital expenditures increased in 2021 as compared to 2020 mainly due to: (i) increased investments in educational technology as we prepare Arco solutions to
migrate to a single technological backbone structure in the upcoming years in the amount of R$43.7 million; (ii) acquisition of software licenses and
development of new projects in R$43.6 million; and (iii) acquisitions for the development of educational content in the 2021 school year of R$32.3 million.
We expect to increase our capital expenditures to support the growth in our business and operations. We expect to meet our capital expenditure needs for
the foreseeable future from our operating cash flow and our existing cash and cash equivalents. Our future capital requirements will depend on several factors,
including our growth rate, the expansion of our research and development efforts, employee headcount, marketing and sales activities, the introduction of new
features to our existing products and the continued market acceptance of our products. We are monitoring our cash position and if needed acquisition of
funds from financial institutions, private debit or public offerings will be timely analyzed.
On January 6, 2021, our Board of Directors approved the Repurchase Program to comply with management long-term incentive plan obligations. Pursuant
to the Repurchase Program, we may repurchase up to 500,000 of our outstanding Class A common shares in the open market, based on prevailing market
prices, or in privately negotiated transactions, over a period beginning on January 6, 2021, continuing until the earlier of the completion of the repurchase or
January 6, 2023, depending upon market conditions. Our Board of Directors will review the Repurchase Program periodically and may authorize adjustments to
its terms and size or suspend or discontinue the Repurchase Program. We expect to use our existing funds to fund repurchases made under the Repurchase
Program.
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Additionally, our Board of Directors authorized our management to appoint J.P. Morgan Securities LLC, or JPMS, as our agent under the Repurchase
Program to purchase securities on our behalf in the open market. Such purchases benefit from the safe harbor provided by Rule 10b-18, or Rule 10b-18,
promulgated by the SEC under the Exchange Act. Accordingly, we shall not take, nor permit any person or entity under our control to take, any action that
could jeopardize the availability of Rule 10b-18 for purchases of securities under the Repurchase Program.
The actual timing, number and value of shares repurchased under the Repurchase Program will depend on several factors, including constraints specified
in the Rule 10b-18, price, general business and market conditions, and alternative investment opportunities. The Repurchase Program does not obligate us to
acquire any specific number of shares in any period, and may be expanded, extended, modified or discontinued at any time.
As of the date of this annual report, we had purchased an aggregate of 1,818,779 Class A common shares for a total of approximately US$43.2 million
under the Repurchase Program.
C. Research and Development, Patents and Licenses, Etc.
See "Item 4. Information on the Company—D. Property, plant and equipment—Intellectual Property.”
D. Trend Information
For a discussion of trend information, see "Item 4. Information on the Company—B. Business Overview—Underlying Trends.”
E. Critical Accounting Estimates
Not applicable.
F. Tabular Disclosure of Contractual Obligations
The following is a summary of our contractual obligations as of December 31, 2021:
December 31, 2021
Trade payables
Lease liabilities
Loans and financing
Derivative financial liabilities
Accounts payable to selling shareholders(1)
(1) See note 16 to our audited consolidated financial statements.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and senior management
Less than
3 to 12
3 months months
103.3
6.0
213.2
—
379.5
702.0
—
14.1
15.2
—
420.1
449.4
1 to 5
years
—
22.9
960.9
—
869.2
1,853.0
More than
5 years
—
0.1
642.0
223.6
—
865.7
Total
103.3
43.1
1,831.3
223.6
1,668.8
3,870.1
We are managed by our board of directors and by our senior management, pursuant to our Articles of Association and the Cayman Islands Companies
Act (As Revised) or the Companies Act.
Board of Directors
As of December 31, 2021, our board of directors was composed of eight members. Each director holds office for the term, if any, fixed by the shareholders’
resolution that appointed him, or, if no term is fixed on the appointment of the director, until the earlier of
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his or her removal or vacation of office as a director in accordance with the Articles of Association. Directors appointed by the board of directors hold office
until the next annual general meeting. Our directors do not have a retirement age requirement under our Articles of Association.
On May 17, 2021, our board of directors appointed Paula Soares de Sá Cavalcante as a member of the board of directors. The appointment of Ms.
Cavalcante, a member of Arco’s founding family, is part of a long-term succession plan for Mr. Oto de Sá Cavalcante and reinforces the family’s long-term
commitment to our Company. The appointment of Ms. Cavalcante will be formally ratified at our annual meeting scheduled to take place on April 29, 2022.
We have service contracts with our executive directors that provide the general terms of their services and applicable compensation.
The following table presents the names of the current members of our board of directors.
Name
Oto Brasil de Sá Cavalcante
Ari de Sá Cavalcante Neto
Paula Soares de Sá Cavalcante
Beatriz Amary
Carla Schmitzberger
Edward Ruiz
Martin Escobari
Stelleo Tolda
* Member of our Audit Committee.
Date of birth
05/27/1946
07/08/1979
12/02/1982
07/16/1978
06/21/1962
04/10/1950
12/03/1971
11/20/1967
Position
Chairman
Director
Director
Independent Director*
Independent Director*
Independent Director*
Independent Director
Independent Director
The following is a brief summary of the business experience of our directors. Unless otherwise indicated, the current business addresses for our directors
is Rua Augusta 2840, 9th floor, suite 91, Consolação, São Paulo - SP, 01412-100, Brazil.
Oto Brasil de Sá Cavalcante is the Chairman of our board of directors, a position he has held since February 2018. Mr. Brasil de Sá Cavalcante has over 50
years’ experience in the education industry. In 2001, he founded Colégio Ari de Sá in Fortaleza, and has been the chairman of its board of directors since 2001.
In 2013, he founded Faculdade Ari de Sá in Fortaleza, and has been its chief executive officer since 2013. He holds a bachelor’s degree in civil engineering from
Universidade Federal do Ceará in Fortaleza.
Ari de Sá Cavalcante Neto is a member of our board of directors and our Chief Executive Officer, positions he has held since February 2018. He has been a
member of the advisory committee at Colégio Ari de Sá since 2007. Mr. de Sá Cavalcante Neto was an associate at Ernst & Young from 1998 to 2000. He was
the chief operating officer of Colégio Ari de Sá from 2001 to 2005 and was an associate at McKinsey & Company in 2006. He holds an MBA from the
Massachusetts Institute of Technology (MIT).
Paula Soares de Sá Cavalcante is a member of our board of directors, a position she has held since May 2021. Ms. Cavalcante previously worked at
Deloitte in the auditing and mergers and acquisitions areas for four years. She holds a bachelor’s degree in Business Administration from the University of
Fortaleza and a postgraduate degree in Finance from Insper.
Beatriz Amary is an independent board member, a position she has held since February 23, 2021. She is a partner focused on emerging markets at
Amadeus Capital, a global technology investor. Before that, she was part of the team responsible for launching Actis, a global emerging markets investment
fund, in São Paulo, leading investments in the consumer, retail, healthcare and education sectors in Latin America. Ms. Amary was responsible for the
investments and held board member positions in CNA, an English Language Training company in Brazil, and Cruzeiro do Sul, an in-class and distance learning
post-secondary education provider in Brazil. Prior to that, Ms. Amary worked in M&A at JP Morgan and Johnson & Johnson. Ms. Amary holds a degree from
Fundação Getúlio Vargas in Brazil and an MBA from Harvard Business School.
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Carla Schmitzberger is an independent board member, a position she has held since February 23, 2021. She was a vice-president at Alpargatas, owner of
the Havaianas brand of sandals, for nearly 14 years, responsible for the internationalization of the business, the expansion of the brand to new product
categories and the establishment of retail operations. Prior to that, Ms. Schmitzberger has worked for eight years at Citibank, holding the positions of Vice-
President of Marketing and Products, Vice-President of Marketing and Head of Citibank Credit Cards Brazil. Ms. Schmitzberger also worked for 11 years at
P&G and 2 years for Johnson & Johnson. Ms. Schmitzberger is currently an independent board member at Natura &Co and Lojas Marisa. Carla holds a
bachelor’s degree in chemical engineering from Cornell University.
Edward Ruiz is a member of our board of directors and the chair of our audit committee, positions he has held since July 2019. Mr. Ruiz is an American
national with over 50 years of experience in public and private accounting. He has been a Certified Public Accountant in the United States since 1972. Edward
retired from Deloitte in 2012, where he was an audit partner and member of Deloitte’s IFRS Specialist Group in Brazil. As Head of the Capital Markets group in
Brazil, Edward advised companies on financial and regulatory reporting matters related to initial public offerings and secondary offerings in Brazil, the United
States and European Capital Markets. Prior to Deloitte, he held executive positions in internal audit at JP Morgan and PepsiCo Inc. in the United States. He
holds a bachelor’s degree in Business Administration from Pace University, New York City and has taken advanced courses related to an Executive MBA at
FIA in São Paulo and governance courses at the Harvard Business School. Since his retirement, Mr. Ruiz has gained extensive board-level experience as a
member and Audit Committee chair of several publicly traded companies in Brazil. Mr. Ruiz is currently a Board member and Audit Committee chair at Nexa
Resources, a mining company listed on the New York Stock Exchange and Toronto Stock Exchange and with mining and smelting operations in Brazil and
Peru.
Martin Escobari is a member of our board of directors, a position he has held since August 2018. He has been with General Atlantic since 2012, and is a
member of its Executive Committee, is the Chair of its Investment Committee, and is the head of its Latin America business. Mr. Escobari serves on the board
of directors of Empreendimentos Pague Menos SA, Invekra, S.A.P.I. de C.V. (d/b/a Laboratórios Sanfer, S.A. de C.V.), Grupo Axo, S.A.P.I. de C.V. and XP
Investimentos, and has previously served on the boards of Ourofino Saude Animal Participações S.A., Sura Asset Management, Smiles S.A. Aceco TI
Participações S.A., Grupo Linx and Decolar.com, Inc. Mr. Escobari co-founded submarino.com and was its chief financial officer from 1999 to 2007. He was an
associate at the Boston Consulting Group (New York) from 1994 to 1996, an investment officer at the private equity firm GP Investimentos from 1998 to 1999,
and a managing director at Advent International from 2007 to 2011. Mr. Escobari holds a bachelor’s degree in economics from Harvard College (Harvard
University) and an MBA (George F. Baker Scholar) from Harvard Business School. He serves on the board of Primeira Chance, a scholarship program for
gifted children in Brazil and is active with Endeavor Brazil, where he mentors young entrepreneurs. Mr. Escobari is also a member of the Brazil office of
Harvard’s Rockefeller Center for Latin American Studies.
Stelleo Tolda is a member of our board of directors, a position he has held since August 2020. He has been the Chief Operating Officer of MercadoLibre
Inc. since April 1, 2009 and had previously served as a senior vice president and as a country manager of Brazil since 1999. Previously, Mr. Tolda worked at
Lehman Brothers Inc. in the United States in 1999, and at Banco Pactual and Banco Icatu in Brazil, from 1996, 1997 and 1994 to 1996, respectively. Mr. Tolda
holds an MBA from Stanford University, and a master’s degree and bachelor’s degree in mechanical engineering from Stanford University.
Board Diversity Matrix
Country of Principal Executive Offices:
Foreign Private Issuer:
Disclosure Prohibited under Home Country Law:
Total Number of Directors:
Board Diversity Matrix (as of December 31, 2021)
Brazil
Yes (the Cayman Islands)
No
8
Part I: Gender Identity
Directors
Female
Male
Did Not
Disclose
Non-Binary Gender
3
5
—
—
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Part II: Demographic Background
Underrepresented Individual in Home Country Jurisdiction
LGBTQ+
Did not Disclose Demographic Background
Executive Officers
—
—
—
—
—
—
—
—
—
—
—
—
Our executive officers are responsible for the day-to-day management of our business and for implementing the general policies and directives
established by our board of directors. We have a strong management team led by Ari de Sá Cavalcante Neto, our Chief Executive Officer, who has broad
experience in the education industry. The members of our management team have worked together as a team for many years. Our executive officers were
appointed by our board of directors for an indefinite term.
The following table lists our current executive officers:
Name
Ari de Sá Cavalcante Neto
Roberto Otero
Renata Ferraz de Toledo Machado
Alexandre Nakamaru
João Cunha Silva
Date of birth
07/08/1979
09/12/1988
04/01/1980
07/29/1976
10/27/1985
Position
Chief Executive Officer
Chief Financial Officer
Chief Operating Officer
Accounting and Legal Officer
Chief Product Officer
The following is a brief summary of the business experience of our executive officers. Unless otherwise indicated, the current business addresses for our
executive officers is Rua Augusta 2840, 9th floor, suite 91, Consolação, São Paulo - SP, 01412-100, Brazil.
Roberto Otero is our Chief Financial Officer, a position he has held since May 6, 2021, when he joined the Company. Prior to joining Arco, he was an
Executive Director of Bank of America Merrill Lynch, working as an Equity Research analyst leading the Education, Healthcare and Infrastructure sectors from
2009 to 2021, with work experiences in both Sao Paulo and New York City. Mr. Otero has an extensive background in corporate finance, financial planning,
investor relations and financial accounting. Mr. Otero holds a bachelor’s degree in Business Administration and Economics from Fundação Getulio Vargas
(FGV-EAESP).
Renata Ferraz de Toledo Machado is our Chief Operating Officer, a position she has held since February 17, 2022. Ms. Machado joined Arco in September
2019 and is currently responsible for Arco’s Operations and Supply Chain area, and is also our People Executive Officer. Prior to joining Arco, Ms. Machado
was an Associate Partner at McKinsey & Company, where for 5 years she held a leading role in projects related to digital transformation for the banking
segment, projects related to bottom line operational improvements, and projects related to best organizational practices to accelerate the delivery of
innovation and new products. Ms. Machado holds a bachelor’s degree in Economics from Universidade de São Paulo (USP), a master’s degree in Economics
from Fundação Getúlio Vargas (FGV-EAESP) and an MBA from the University of Chicago.
Alexandre Nakamaru is our Accounting and Legal Officer, a position he has held since May 6, 2021. Mr. Nakamaru joined Arco in June 2019 as Financial
Officer. Mr. Nakamaru has 18 years of experience working at large multinational companies in Brazil (including Monsanto, AmBev and Natura), in audit roles at
Deloitte and as the Chief Financial Officer of two private equity owned companies. Mr. Nakamaru holds a bachelor’s degree in business administration from
Fundação Armando Alvares Penteado (FAAP) and a post-graduation degree in controllership from Fundação Getúlio Vargas (FGV-EAESP).
João Cunha Silva is our Chief Product Officer, a position he has held since September 2, 2020. Mr. Cunha is currently our Chief Product Officer and Chief
Executive Officer of SAS, one of our core business units, position held since 2018. Mr. Cunha joined Arco in January 2011 and has occupied several positions
since then, including as Arco’s Chief Operating Offer, from February 2018 to September 2020. Prior to joining Arco, Mr. Cunha Silva was an associate at
Boston Consulting Group from January 2008 to September 2009. He holds a bachelor’s degree in Computer Engineering from Universidade Estadual de
Campinas (Unicamp), and a certificate from the Executive Leadership Development program at Stanford University.
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Family Relationships
Oto Brasil de Sá Cavalcante, our Chairman, is the father of Ari de Sá Cavalcante Neto, our Chief Executive Officer, and of Paula Soares de Sa Cavalcante, a
member of our board of directors.
Directors’ and Officers’ Insurance
We have contracted civil liability insurance coverage for acts carried out by our directors and executive officers in the course of their duties.
B. Compensation
Compensation of Directors and Key Executives
Under Cayman Islands law, we are not required to disclose compensation paid to our senior management on an individual basis and we have not
otherwise publicly disclosed this information elsewhere.
Our executive officers, directors and management receive fixed, variable and share-based compensation. They also receive benefits in line with market
practice in Brazil.
Fixed Compensation
The fixed component of their compensation is set on market terms and adjusted annually. In general, approximately 32% of our management
compensation is composed of a fixed component.
Variable Compensation
The variable component consists of cash bonuses and awards of shares (or the cash equivalent). Cash bonuses or paid to executive officers and
members of our management based on previously agreed targets for the business. The variable compensation represents approximately 68% of our
management compensation, 50% of which is connected to our corporate goals.
Share-based Compensation
Shares (or the cash equivalent) are awarded under our share options long-term incentive program, as discussed below. We believe that our Long-Term
Incentive Plan enhances the dedication of our executives towards achieving our goals.
Long-Term Incentive Plan (LTIP) and Share-based Compensation
Restricted Shares Grant Plan
On April 30, 2019, our board of directors approved our restricted share long-term incentive program, or the "Restricted Shares Grant Plan.” The maximum
number of shares that can be issued under the Restricted Shares Grant Plan may not exceed 5% of our share capital at any time. The Restricted Shares Grant
Plan is administered by our board of directors and a designated committee (the "Restricted Share Plan Advisory Committee”).
Our and our controlled companies’ directors, officers, employees and professionals of any nature may participate in the Restricted Shares Grant Plan,
which is composed of two underlying programs: (i) the regular program, pursuant to which we will grant restricted shares to the participant at no cost, subject
to certain vesting and/or performance conditions (the "Regular Program”) and (ii) the matching shares program, pursuant to which we will match the number
of Class A shares (at no additional cost to the participant) that were acquired by the participant at fair market value ("investment shares”), using the amounts
received by the participant as a short term incentive and designated by our board of directors to be used as an investment in investment shares, provided
certain vesting conditions are satisfied (the "Matching Program”).
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Under the matching shares program, participants are required to (i) be employed or providing services to us through each vesting date, as set forth in the
applicable award agreement and (ii) hold the investment shares through each vesting date. The vesting period may not exceed five years. In addition, upon
each vesting date, a portion of the investment shares will become free of restrictions and the participant will be allowed to freely negotiate such shares. Under
the regular shares program, the participant’s right to receive the restricted shares will be subject to the participant remaining continuously bound as our
employee, officer, or director, as applicable, through each vesting, which may not exceed five years.
If a participant is dismissed by us with cause or voluntarily terminates his or her employment or service relationship with us, the participant will forfeit any
right to the unvested shares. If the participant is dismissed by us without cause or by mutual agreement between us and the participant, the participant will be
entitled to receive his or her vested shares and a pro rata amount of the granted and unvested shares, by reference to the vesting period in which the
termination occurred and based on the number of days the participant was employed by us. In case of the participant’s death or permanent disability, the
participant (or his or her heirs) will be entitled to receive all the granted shares, whether or not vested, which will be delivered upon termination of the original
vesting period.
If our shares cease to be publicly traded or in an event of a change in our control, the vesting period of the granted shares will be accelerated, as
applicable. In each such case, each participant may elect to (i) sell his or her granted shares at a price equal to the price at which the shares were sold in
connection with the transaction resulting in the Company becoming privately owned or in a change of control, or (ii) remain a shareholder of the Company
subject to the approval of the board of directors.
Awards of restricted shares and matching shares may be settled in shares or cash, as determined by our board of directors. The restricted shares and
matching shares may not be pledged, assigned or transferred to third parties, without the prior approval of our board of directors. Participants in the
Restricted Share Grant Plan will be subject to a two-year post-termination of employment or service noncompete and prohibition against soliciting our
employees, service providers and customers. The Restricted Shares Grant Plan provides that the Company shall withhold a portion of the restricted shares
units to comply with all taxes applicable to the delivery of the restricted shares units to the beneficiary.
As of March 31, 2022, we had 118,155 restricted shares units outstanding under the Regular Program and Matching Program.
Regular Programs
The Restricted Plan Advisory Committee approves the participants of each Regular Program, from time to time. The table below shows the grant date and
market value on the grant date of the share units granted by us up to March 31, 2022, under the Regular Programs.
Grant Date
April 30, 2019
June 30, 2019
October 15, 2019
January 23, 2020
March 2, 2020
March 4, 2020
September 3, 2020
November 19, 2020
February 10, 2021
February 10, 2021
February 26, 2021
June 24, 2021
September 30, 2021
March 25, 2022
No. of Unit Shares (up to)
Value per Unit Share
542,760
3,086
37,929
13,000
36,673
13,164
3,600
6,648
70,320
1,838
1,836
107,770
872,750
2,900
R$
R$
R$
R$
R$
R$
R$
R$
R$
R$
R$
R$
R$
R$
126.76
192.19
200.18
214.48
238.93
254.21
245.18
216.63
204.03
204.03
196.58
165.21
118.02
96.84
Regular Program*
1st Program
3rd Program
2nd Program
4th Program
5th Program
6th Program
7th Program
8th Program
9th Program
10th Program
11th Program
14th Program
15th, 16th, 17th, 18th and 19th
Program
20th Program
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*
The 12th and 13th Programs are the 1st and 2nd Matching Programs respectively, as described below.
All such shares will be available for sale by the beneficiaries annually, over three or four years, on each date of the anniversary of the IPO or March 31,
depending on the program.
Matching Program
On February 26, 2021, our Restricted Shares Plan Advisory Committee approved our first Matching Program (12th Program). On June 1, 2021, our second
Matching Program was approved (13th Program). The table below shows the grant date and market value on the grant date of the share units granted by us up
to March 31, 2021, under the Matching Programs.
Grant Date
February 26, 2021
June 1, 2021
Matching Program
1st Program
2nd Program
No. of Unit Shares
Value per Unit Share
9,364
476
R$
R$
196.58
148.28
All such shares, including the investment shares acquired by the participants of the Matching Program, will be available for sale by the beneficiaries
annually, over four years, on March 31 of each year.
LTIP I
Certain members of our management participate in our share option long-term incentive program, or the LTIP I. Beneficiaries under the LTIP I are granted
rights to buy shares based on certain criteria.
After our initial public offering in September 2018, all the options of the LTIP I were cancelled and reissued by Arco and automatically vested, generating
an expense in our consolidated statement of income (loss) of R$59,747 thousand in 2018 (compared to an expense of R$1,359 thousand in 2017 and an expense
of R$2,043 thousand in 2016). As of December 31, 2019, all 1,091,039 share options were exercised by the beneficiaries and no additional options were granted
under the LTIP I.
C. Board Practices
Committees of the Board of Directors
Our board of directors has two standing committees: Audit Committee and Compensation Committee.
Audit Committee
The audit committee, which consists of Edward Ruiz, Beatriz Amary and Carla Schmitzberger, assists our board of directors in overseeing our accounting
and financial reporting processes and the audits of our financial statements. In addition, the audit committee is directly responsible for the appointment,
compensation, retention and oversight of the work of our independent registered public accounting firm. Edward Ruiz serves as Chairman of the audit
committee. The audit committee consists exclusively of members of our board of directors who are financially literate, and Edward Ruiz is considered an "audit
committee financial expert” as defined by the SEC. Our board of directors has determined that Edward Ruiz, Beatriz Amary and Carla Schmitzberger dos Santos
satisfy the "independence” requirements set forth in Rule 10A-3 under the Exchange Act.
The audit committee is governed by a charter that complies with Nasdaq rules. The audit committee is responsible for, among other matters:
● the appointment, compensation, retention and oversight of any auditor or accounting firm engaged for the purpose of preparing or issuing an audit
report or performing other audit, review or attest services;
● pre-approving the audit services and non-audit services to be provided by our independent auditor before the auditor is engaged to render such
services;
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● reviewing and discussing with the independent auditor its responsibilities under generally accepted auditing standards, the planned scope and
timing of the independent auditor’s annual audit plan(s) and significant findings from the audit;
● obtaining and reviewing a report from the independent auditor describing all relationships between the independent auditor and the Company
consistent with the applicable PCAOB requirements regarding the independent auditor’s communications with the audit committee concerning
independence;
● confirming and evaluating the rotation of the audit partners on the audit engagement team as required by law;
● reviewing with management and the independent auditor, in separate meetings whenever the Audit Committee deems appropriate, any analyses or
other written communications prepared by the Management and/or the independent auditor setting forth significant financial reporting issues and
judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative IFRS methods on the
financial statements; and other critical accounting policies and practices of the Company;
● reviewing, in conjunction with the Chief Executive Officer and Chief Financial Officer of the Company, the Company’s disclosure controls and
procedures and internal control over financial reporting;
● establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal accounting
controls or auditing matters, and the confidential, anonymous submission by employees of the Company of concerns regarding questionable
accounting or auditing matters;
● approving or ratifying any related person transaction in accordance with our internal policies and applicable legislation; and
● review, direct and supervise the actions of the Ethics Committee, which analyzes, investigates and take the proper measures in case of misconduct by
any employee and breaches of the Company’s Code of Ethics and other internal policies.
The audit committee meets as often as it determines is appropriate to carry out its responsibilities, but in any event, meets at least four times per year.
Compensation Committee
Our compensation committee was created on March 12, 2020, by our board of directors, and it is composed of two members, Edward Ruiz and Carla
Schmitzberger.
Our compensation committee assists our board of directors in reviewing and approving the compensation structure, including all forms of compensation,
relating to our directors and executive officers. The committee reviews the total compensation package for our executive officers and directors and
recommends to the board of directors for determination the compensation of each of our directors and executive officers and will periodically review and
approve any long-term incentive compensation or equity plans, programs or similar arrangements, annual bonuses, and employee pension and benefits plans.
Our board of directors has determined that Edward Ruiz and Carla Schmitzberger satisfy the requirements set forth Nasdaq Listing Rule 5605(d), which
requires that a compensation committee consist entirely of independent directors.
Restricted Shares Plan Advisory Committee
Our restricted shares plan advisory committee was created on September 30, 2019, by our board of directors, and its composed by three members, Ari de
Sá Cavalcante Neto, Renata Ferraz de Toledo Machado (our Chief Operating Officer) and Alexandre Shozo Nakamaru (our Accounting and Legal Officer),
which assists the board of directors on matters regarding the Restricted Shares Grant Plan.
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D. Employees
As of December 31, 2021, 2020 and 2019, we had 2,986, 2,746 and 1,949 employees, respectively. As of December 31, 2021, 553 of these employees were
based in our offices in Fortaleza, 854 of these employees were based in our offices in Curitiba, 1,145 of these employees were based in our offices in São Paulo
and 434 were based in cities elsewhere in Brazil. As of December 31, 2021, 2020 and 2019, we had 495, 461 and 362 sales consultants, respectively. References
in this annual report to sales consultants are to our commercial team in the field. We also engage temporary employees and consultants as needed to support
our operations.
We update the full-time personnel functions into 6 categories as described below:
● Key Executives: Composed of Arco’s CEO, CFO, CPO, A&LO, Arco Plus CEO, COO, CTO, Positivo CEO and ESG Director;
● Business Unit Directors: CEOs of Arco’s business units (Directors who report directly to Arco’s CEO have not been accounted in this category, but
only as key executives);
● Technology and Content Development: staff and management of our technology and content development teams;
● Sales and Marketing: staff and management of our sales and marketing teams;
● Customer support: staff and management of our customer support teams; and
● General and Administrative: staff and management of our administrative teams.
The table below breaks down our full-time personnel by function as of December 31, 2021.
Key Executives
Business Unit Directors
Technology and Content Development
Sales and Marketing
Customer Support
General and Administrative
Total
Function
Number of
Employees
% of Total
9
10
892
753
759
563
2,986
0 %
0 %
30 %
26 %
25 %
19 %
100 %
The table below breaks down our full-time personnel by function as of December 31, 2021, 2020 and 2019:
Number of
Number of
Number of
Function
Key Executives
Business Unit Directors
Technology and Content Development
Sales and Marketing
Customer Support
General and Administrative
Total
Employees 2021 Employees 2020 Employees 2019
7
2
722
541
336
341
1,949
9
10
892
753
759
563
2,986
9
5
902
799
580
451
2,746
Our employees are represented by labor unions through collective agreements (convenções coletivas) they have with such labor unions. These collective
agreements are renegotiated annually. We have not experienced any work stoppages, and we consider our relations with our employees to be good.
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None of our executive officers have entered into employment agreements directly with the Company. All the employment agreements of the executive
officers were entered into with CBE. Those agreements are the sole agreement existing to regulate the executive officers’ activities.
E. Share ownership
The shares and any outstanding beneficially owned by our directors and officers and/or entities affiliated with these individuals are disclosed in "Item 7.
Major Shareholders and Related Party Transactions—A. Major Shareholders.”
See "Item 6. Directors, Senior Management and Employees—B. Compensation—Long-Term Incentive Plan (LTIP)” for information on our share option
long-term incentive program.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table and accompanying footnotes present information relating to the beneficial ownership of our Class A common shares and Class B
common shares as of December 31, 2021.
The number of common shares beneficially owned by each entity, person, executive officer or director is determined in accordance with the rules of the
SEC, and the information is not necessarily indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any
shares over which the individual has sole or shared voting power or investment power as well as any shares that the individual has the right to acquire within
60 days through the exercise of any option, warrant or other right. Except as otherwise indicated, and subject to applicable community property laws, the
persons named in the table have sole voting and investment power with respect to all common shares held by that person.
The percentages of beneficial ownership in the table below are calculated as of December 31, 2021, on the basis of (i) 29,450,551 Class A common shares
outstanding, and (ii) 27,400,848 Class B common shares outstanding. In addition to the shares detailed below, we have a total of 28,346,059 Class A common
shares outstanding that are publicly traded as of December 31, 2021.
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Unless otherwise indicated below, the address for each beneficial owner is c/o Arco, Rua Augusta 2840, 9th floor, suite 91, Consolação, São Paulo - SP,
01412-100, Brazil.
Shareholders
5% Shareholders
Oto Brasil de Sá Cavalcante(3)
Ari de Sá Cavalcante Neto(2)
Other Shareholders
Other Shareholders
Treasury
Executive Officers and Directors
Oto Brasil de Sá Cavalcante(3)
Ari de Sá Cavalcante Neto(2)
Paula Soares de Sá Cavalcante
João Cunha Silva
Roberto Rabello Otero
Alexandre Nakamaru
Martin Escobari
Stelleo Tolda
Edward Ruiz
Beatriz Amary
Carla Schmitzberger
All directors and executive officers as a group
Shares Beneficially Owned as of December 31, 2021
Class A
Class B
Shares
%
Shares
%
% of Total
Voting
Power(1)
—
371,777
—
605,316
—
371,777
—
*
—
*
—
—
*
—
—
560,762
—
1.3 %
18,966,953
8,297,485
—
2.1 %
—
1.3 %
—
*
—
*
—
—
*
—
—
1.9 %
112,710
—
18,966,953
8,297,485
*
—
—
—
—
—
—
—
—
27,264,438
69.2 %
30.3 %
*
—
69.2 %
30.3 %
*
—
—
—
—
—
—
—
—
99.5 %
62.5 %
27.5 %
*
—
62.5 %
27.5 %
*
*
—
*
—
—
*
—
—
89.8 %
* Represents beneficial ownership of less than 1% of our issued and outstanding common shares.
(1) Percentage of total voting power represents voting power with respect to all of our Class A common shares and Class B common shares, as a single class.
Holders of our Class B common shares are entitled to 10 votes per share, whereas holders of our Class A common shares are entitled to one vote per
share. For more information about the voting rights of our Class A common shares and Class B common shares, see "Item 10. Additional Information—B.
Memorandum and articles of association.”
(2)
Indirectly owns Class B common shares through ASCN Investments Ltd.
(3)
Indirectly owns Class B common shares through OSC Investments Ltd.
The holders of our Class A common shares and Class B common shares have identical rights, except that our Founding Shareholders as holders of Class
B common shares (i) are entitled to 10 votes per share, whereas holders of our Class A common shares are entitled to one vote per share (ii) have certain
conversion rights and (iii) are entitled to maintain a proportional ownership interest by purchasing additional Class B common shares in the event that
additional Class A common shares are issued. For more information see "Item 10. Additional Information—B. Memorandum and articles of association—
Preemptive or Similar Rights” and "Item 10. Additional Information—B. Memorandum and articles of association —Conversion.” Each Class B common share
is convertible into one Class A common share.
B. Related party transactions
Educational Agreement—International School Program
On August 2, 2016, Educadora ASC Ltda., or Educadora ASC, entered into an agreement with International School, pursuant to which International
School agreed to (i) make available to Educadora ASC an educational platform that it developed, and (ii) supply to Educadora ASC the related materials, and
Educadora ASC agreed to pay certain fees to International School in connection
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therewith. The net revenue from sales to Educadora ASC totaled R$1.1 million, R$2.9 million and R$3.2 million for the years ended December 31, 2021, 2020 and
2019.
Development and Promotion of Educational Materials Agreement
On August 29, 2014, Educadora ASC and Livraria ASC Ltda., or Livraria ASC, entities under common control of our controlling shareholder, entered into
an agreement with SAS Desenvolvimento e Promoção de Material Didático, or SAS Material Didático, which was merged into CBE on January 2021,
pursuant to which (i) SAS Material Didático agreed to (a) make available to Educadora ASC and Livraria ASC an educational platform that it developed, and
(b) supply to Educadora ASC and Livraria ASC the related materials, and (ii) Educadora ASC agreed to promote the educational platform and share its
expertise in educational management with SAS Material Didático, and Educadora ASC and Livraria ASC agreed to pay certain fees to SAS Material Didático
in connection therewith.
The agreement is for an initial term of 10 years and will be automatically renewed for an additional 5 years or 10 years respectively, should there be a
change of control or initial public offering of CBE or any of the companies in SAS Material Didático’s economic group. The net revenue from sales to
Educadora ASC totaled R$0.3 million, R$0.3 million and R$0.4 million for the years ended December 31, 2021, 2020 and 2019, respectively. The net revenue from
sales to Livraria ASC totaled R$3.3 million, R$4.9 million and R$5.2 million for the years ended December 31, 2021, 2020 and 2019, respectively. Due to the
merger of SAS Desenvolvimento (or Arco Ventures) with CBE, on December 2020, the agreements with Educadora ASC and Livraria ASC were assigned to
CBE as a part of the group reorganization. The values described herein for December 2020 consists of the total net revenue, considering the sales for SAS
Desenvolvimento and CBE.
Loan and Debentures Agreements with Geekie
On January 17, 2019, we entered into an agreement (the "Geekie Agreement”) with Geekie, our subsidiary company. Pursuant to the Geekie Agreement, we
purchased 100,000 debentures issued by Geekie, each at par value R$100.00, totaling R$10 million. The debentures mature in June 2022 and bears interest at
110% of the CDI, as described in note 10 to our audited consolidated financial statements.
In addition, and pursuant to the Geekie Agreement, we lent R$4.0 million to Geekie Partners S.A., the former controlling entity of Geekie. The loan is
repayable in a single instalment in June 2022, bears interest at 110% of the CDI, and is secured by the shares of Geekie Partners S.A. in Geekie.
The transaction totaled R$14.0 million and its purpose was to support Geekie’s working capital needs.
On June 1, 2021, we lent R$5.5 million to Geekie, in accordance with the investment agreement executed on November 27, 2020. The loan is payable in a
single instalment in June 2022, bears an interest of 110% of the CDI and is secured by the shares of Geekie Partners S.A. in Geekie.
Inter Company Loan Agreements
We have entered into several intercompany loan agreements that have not yet matured in order to develop our activities, as described below:
Lender
Arco Educação
Arco Educação
Arco Educação
Arco Educação
Companhia Brasileira
Companhia Brasileira
Arco Educação
Date of the Agreement
Total Principal Amount
March 27, 2020
April 15, 2020
R$
R$
February 1st, 2021 US$
March 31, 2021
April 7, 2021
April 13, 2021
R$
R$
R$
August 23, 2021 US$
102
5 million
11.5 million
10 million
35 million
35 million
35 million
3 million
Interest Rate
100% of the CDI
100% of the CDI
100% of the CDI
100% of the CDI
100% of the CDI
100% of the CDI
100% of the CDI
Maturity Date
March 27, 2023
March 27, 2023
March 31, 2023
March 31, 2024
March 31, 2023
March 31, 2025
March 31, 2024
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Arco Educação
Arco Educação
Arco Educação
Investment in Isaac
September 15, 2021 US$
October 4, 2021 US$
January 6, 2022 US$
10 million
10 million
10 million
100% of the CDI
100% of the CDI
100% of the CDI
March 31, 2026
March 31, 2024
March 31, 2026
On January 25, 2021, we entered into a Series B Ordinary Shares Purchase Agreement, among other ancillary and transactional documents, with INCO
Limited, or INCO, the controlling entity of OISA Tecnologia e Serviços Ltda., or OISA (a company indirectly controlled by David Peixoto dos Santos, Arco’s
former CFO), pursuant to which we acquired 8,571,427 series B ordinary shares, equivalent to 30% of the total stock capital of INCO, for a R$25million. INCO
Limited provides financial assistance to private schools.
In addition, on April 22, 2021, we and other investors entered into a Series A and Series A-1 Preferred Shares Purchase Agreement, pursuant to which we
acquired 3,653,788 Series A Preferred Shares of INCO Limited, for R$33.2 million, with the option to acquire an additional 2,935,010 Series A-1 Preferred Shares,
which was exercised on September 17, 2021 for an amount of R$52.0 million.
As of March 31, 2022, INCO Limited had additional investments rounds in which we did not participate. As of the date of this annual report, we hold
47,375,702 shares of INCO Limited, equivalent to 25.06% of its total capital stock (22.43% on fully diluted basis) and made a total investment equivalent to
R$110.3 million.
Sale of Escola de Aplicação São José dos Campos Ltda.
On January 2, 2019, we sold the shares we owned in Escola de Aplicação São José dos Campos Ltda. to its minority shareholders. The transaction price of
R$3.7 million will be paid in sixteen quarterly installments from January 2022 to October 2025, adjusted by the IGP-M. On October 23, 2020, the buyers have
anticipated the payment of the installments due in 2022 and the first installment of 2023. On February 26, 2021, the parties executed an amendment to the
purchase agreement, which was agreed that the installments to be paid in 2021 will be adjusted by the IPCA. The purchase price was fully paid on August 23,
2021.
Indemnification Agreements
We have entered into indemnification agreements with each of our directors and executive officers. Pursuant to these agreements, we have agreed to
indemnify and hold harmless each director and officer to the full extent permitted by applicable law in the event of any claim made against him or her in any
proceeding due to the fact that he or she is or was a director or officer of our company or served at our request as a director, officer, employee or agent of
another corporation, partnership, joint venture, trust or other enterprise.
In addition, under the terms of these agreements we have agreed to cover all expenses actually and reasonably incurred by each director and officer in
connection with any such proceeding, with certain limited exceptions.
The indemnification extends to the beneficiary’s services as a director or officer prior to the date of the indemnification agreement as well as afterward. It
continues after the beneficiary ceases to be a director or officer.
C. Interests of experts and counsel
Not applicable.
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ITEM 8. FINANCIAL INFORMATION
A. Consolidated statements and other financial information
Financial statements
See "Item 18. Financial Statements,” which contains our audited financial statements prepared in accordance with IFRS.
Dividends and Dividend Policy
We have not adopted a dividend policy with respect to future distributions of dividends. The amount of any distributions will depend on many factors
such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors and, where
applicable, our shareholders. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our
business and we do not anticipate paying any cash dividends in the foreseeable future.
Subject to the Companies Act, Arco’s shareholders may, by resolution passed by a simple majority of the voting rights entitled to vote at a general
meeting, declare dividends (including interim dividends) to be paid to shareholders but no dividend shall be declared in excess of the amount recommended
by the board of directors. The board of directors may also declare dividends. Dividends may be declared and paid out of funds lawfully available to Arco.
Except as otherwise provided by the rights attached to shares and the Articles of Association of Arco, all dividends shall be paid in proportion to the number
of Class A common shares or Class B common shares a shareholder holds at the date the dividend is declared (or such other date as may be set as a record
date); but, (i) if any share is issued on terms providing that it shall rank for dividend as from a particular date, share shall rank for dividend accordingly, and (ii)
where we have shares in issue which are not fully paid up (as to par value) we may pay dividends in proportion to the amounts paid up on each share.
The holders of Class A common shares and Class B common shares shall be entitled to share equally in any dividends that may be declared in respect of
Arco’s common shares from time to time. In the event that a dividend is paid in the form of Class A common shares or Class B common shares, or rights to
acquire Class A common shares or Class B common shares, (1) the holders of Class A common shares shall receive Class A common shares, or rights to
acquire Class A common shares, as the case may be; and (2) the holders of Class B common shares shall receive Class B common shares, or rights to acquire
Class B common shares, as the case may be.
We have not declared or paid any dividends to our shareholders since our incorporation in the Cayman Islands on April 12, 2018. However, CBE, our
principal operating company and the wholly owned subsidiary of Arco Brazil at that time, paid significant dividends to the shareholders of CBE, including
R$13.5 million in February 2016 and R$75.0 million in September 2017.
In addition, a dividend payment of R$10.5 million (based on CBE’s net profit for the year ended December 31, 2017, and pursuant to the Brazilian
Corporate Law which requires CBE to pay a minimum dividend equal to 25% of its net profit for the year) which was declared by the management of CBE was
approved at the PSD Educação S.A. Shareholders’ Meeting and paid to the shareholders of CBE on June 25, 2018. In addition, CBE approved an additional
dividend of R$74.5 million on June 7, 2018, which was paid to the shareholders of CBE on June 25, 2018. There was no distribution of dividends of CBE in 2019,
2020 and 2021.
Certain Cayman Islands and Brazilian Legal Requirements Related to Dividends
Under the Companies Act and our Articles of Association, a Cayman Islands company may pay a dividend out of either its profit or share premium
account, but a dividend may not be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business.
According to our Articles of Association, dividends can be declared and paid out of funds lawfully available to us, which include the share premium account.
Dividends, if any, would be paid in proportion to the number of common shares a shareholder holds. For further information, see "Item 10. Additional
Information—E. Taxation—Cayman Islands Tax Considerations.”
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Additionally, please refer to "Item 3. D. Risk Factors—Certain Factors Relating to Our Business and Industry—We depend on dividend distributions by
our subsidiaries, and we may be adversely affected if the performance of our subsidiaries is not positive or if Brazil imposes legal restrictions on dividend
distributions by subsidiaries.” Our ability to pay dividends is directly related to positive and distributable net results from our Brazilian subsidiaries. If, for any
legal reasons due to new laws or bilateral agreements between countries, they are unable to pay dividends to Cayman Islands companies, or if a Cayman
Islands company becomes incapable of receiving them, we may not be able to make any dividend payments in the future.
Legal proceedings
We are, and may be from time to time, involved in disputes that arise in the ordinary course of our business. Claims against us can be time-consuming,
result in costly litigation, require significant management time and result in the diversion of significant operational resources.
We are subject to a number of judicial and administrative proceedings in the Brazilian court systems, including civil, labor and tax law claims and other
proceedings. We recognize provisions for legal proceedings in our financial statements when (i) it is probable that an outflow of resources will be required to
settle the obligation, and (ii) a reliable estimate can be made of the amount of the obligation. The assessment by our management of the likelihood of loss
includes analysis by outside counsel of available evidence, the hierarchy of laws, available case law, recent court rulings and their relevance in the Brazilian
legal system. Our provisions for probable losses arising from these matters are estimated and periodically adjusted by management. In making these
adjustments, our management relies on the opinions of our external legal advisors.
As of December 31, 2021, we had a provision for legal proceedings of R$630 thousand recorded in our financial statements in connection with legal
proceedings, based on the advice of our external legal counsel that the likelihood of loss in connection with such proceedings is probable. However, legal
proceedings are inherently unpredictable and subject to significant uncertainties. If one or more cases were to result in a judgment against us in any reporting
period for amounts that exceeded our management’s expectations, the impact on our operating results or financial condition for that reporting period could be
material. See "Item 3. Key Information—D. Risk Factors—Certain Factors Relating to Our Business and Industry—Unfavorable decisions in our legal,
arbitration or administrative proceedings may adversely affect us.”
Civil Matters
As of December 31, 2021, we were a defendant to approximately 62 judicial and administrative proceedings of a civil nature for which we did not record
any provision based on the advice of our external legal counsel that the likelihood of loss in connection with these proceedings was not probable. The civil
claims to which we are a party generally relate to consumer claims, including those related to the early termination of certain of our agreements, among others.
We believe these proceedings are unlikely to have a material adverse impact, individually, or in the aggregate, on our results of operations or financial
condition.
As of December 31, 2021, we were party to two administrative proceeding of civil nature filed by the prosecutor’s offices in the States of Ceará and
Maranhão.
The proceeding in the State of Ceará results from a complaint filed on behalf of some students’ parents of one of our partner schools alleging that the
students are required to purchase our educational material only from the partner school in which the student is enrolled in at prices higher than those charged
by other partner schools in the region, with no option to purchase such educational material at bookstores or other points of sale. We have filed our answers,
which are currently under review.
The proceedings filed by the prosecutor’s offices in the state of Maranhão, result from the questioning of students’ parents of some our partner schools
in the region about the impossibility of using used books and acquiring access to our digital content without acquiring the full platform provided by us. We
have already filed our answers, which are currently under review.
As both the proceedings are still ongoing and at early stage, it is not possible to confirm the claims that may be asserted against us, however the
applicable prosecutors’ offices may file a public civil claim or require the parties to enter into a settlement agreement (Termo de Ajustamento de Conduta -
TAC), requiring the partner schools to adjust its commercial practices as they relate to the sale of
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educational material. As of March 31, 2022, we cannot estimate the amount of any eventual fine or any claim for damages, or collective non-material damages
that may be imposed on us as a result of this proceeding.
Labor Matters
As of December 31, 2021, we were party to approximately 20 labor-related judicial and administrative proceedings for which we did not record any
provision based on the advice of our external legal counsel that the likelihood of loss in connection with these proceedings was not probable. In general, the
labor claims to which we are a party were filed by former employees or third-party employees seeking our joint and/or subsidiary liability for the acts of our
suppliers and service providers. The principal claims involved in these labor suits relate to overtime, salary equalization termination fees, and indemnities
based on Brazilian labor laws. We believe these proceedings are unlikely to have a material adverse impact, individually or in the aggregate, on our results of
operations or financial condition.
Tax and Social Security Matters
As of December 31, 2021, we were party to 12 administrative tax and social security proceeding for which we did not record any provision based on the
advice of our external legal counsel that the likelihood of loss in connection with this proceeding was not probable.
Request for Arbitration
On September 19, 2019, Mr. Ulisses Borges Cardinot, a 48.52% shareholder in our subsidiary, International School, filed a request for arbitration with the
Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada in Brazil against Arco Platform Limited, Companhia Brasileira de Educação e
Sistemas de Ensino S.A. (formerly known as PSD Educação S.A. (until 2021), EAS Educação S.A (until 2020) and SAS Educação S.A. (until 2017)), or CBE, and
Arco Educação S.A.
This request for arbitration purporting to assert Mr. Cardinot’s rights under the Investment Agreement (for more information regarding the Investment
Agreement, see "Item 4.A. History and development of the company—Acquisitions and Investments—Acquisition of International School”) is still ongoing.
Mr. Cardinot has asserted that, among others, he is entitled to receive shares of Arco Platform and the purchase price due pursuant to the Investment
Agreement is materially higher. On October 10, 2019, we filed our response to the request for arbitration, denying Mr. Cardinot’s claims and affirming that
Arco Platform and Arco Educação cannot be parties to the arbitration since they are not parties to the Investment Agreement. On July 6, 2020, Arco Brazil, the
Company and CBE filed their statements of defense. On August 10, 2020, Ulisses Cardinot filed his reply to the statements of defense. On September 14, 2020,
Arco Brazil, the Company and CBE filed their rejoinders.
On November 29, 2021, the arbitration panel issued a partial award on the merits of the arbitration. The decision is under the ongoing review of financial
and legal advisors of CBE and its calculation will be further discussed in the award phase of the arbitration proceeding. However, the arbitration panel decided
that (i) Arco Platform and Arco Brazil are not subject to the terms of the Investment Agreement and, therefore, will not be part of the arbitration proceeding;
(ii) Mr. Cardinot is not entitled to receive shares of Arco Platform; and (iii) the amount due by CBE will be calculated based on 10 times realized EBITDA for
the school years of 2019 (first installment) and 2020 (second installment), both net of net debt, as determined in the Investment Agreement, consistent with the
calculation methodology to estimate the provisioned amount in our balance sheet as reported.
The submissions had not caused a material impact on our assessment of the applicable liabilities or on the provisions made by us in the financial
statements.
We are vigorously defending ourselves on the award phase of the arbitration proceeding. If an unfavorable decision were to occur, it could result in a
material adverse impact on our financial position and results of operations in the period in which the decision occurs, or in future periods, and on the price of
our Class A common shares.
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B. Significant changes
None.
ITEM 9. THE OFFER AND LISTING
A. Offering and listing details
On September 28, 2018, we completed our initial public offering. Subsequently, we completed a follow-on offering on: (i) October 24, 2019; (ii) June 4, 2020;
and (iii) September 8, 2020. Our common shares have been listed on the Nasdaq Global Select Market since September 26, 2018 under the symbol "ARCE.”
B. Plan of distribution
Not applicable.
C. Markets
For a description of our publicly traded common shares, see "—A. Offering and listing details.”
D. Selling shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share capital
Not applicable.
B. Memorandum and articles of association
Our shareholders adopted the Amended and Restated Memorandum and Articles of Association included as Exhibit 3.1 to the Amendment No. 2 to our
registration statement on Form F-1 (File no. 333-227007), filed with the SEC on September 12, 2018.
Share Capital
The Memorandum and Articles of Association authorize two classes of common shares: Class A common shares, which are entitled to one vote per
share, and Class B common shares, which are entitled to 10 votes per share and to maintain a proportional ownership interest in the event that additional Class
A common shares are issued. Any holder of Class B common shares may convert his or her shares at any time into Class A common shares on a share-for-
share basis. The rights of the two classes of common shares are otherwise identical, except as described below. The implementation of this dual class
structure was required by Oto Brasil de Sá Cavalcante and Ari de Sá Cavalcante Neto, our principal shareholders, as a condition of undertaking the initial
public offering of our common shares. See "—Anti-Takeover Provisions in our Articles of Association—Two Classes of Shares.”
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As of December 31, 2021, Arco had a total issued share capital of U.S.$2,842.57, divided into 56,851,399 common shares of a nominal or par value of
U.S.$0.00005. Those common shares are divided into 29,450,551, issued Class A common shares and 27,400,848 Class B common shares.
Treasury Shares
As of December 31, 2021, Arco had 605,316 shares in treasury.
Issuance of Shares
Except as expressly provided in Arco’s Articles of Association, Arco’s board of directors has general and unconditional authority to allot, grant options
over, offer or otherwise deal with or dispose of any unissued shares in the company’s capital without the approval of our shareholders (whether forming part
of the original or any increased share capital), either at a premium or at par, with or without preferred, deferred or other special rights or restrictions, whether in
regard to dividend, voting, return of capital or otherwise and to such persons, on such terms and conditions, and at such times as the directors may decide,
but so that no share shall be issued at a discount, except in accordance with the provisions of the Companies Act. In accordance with its Articles of
Association, Arco shall not issue bearer shares.
Arco’s Articles of Association provide that at any time that there are Class A common shares in issue, additional Class B common shares may only be
issued pursuant to (1) a share split, subdivision of shares or similar transaction or where a dividend or other distribution is paid by the issue of shares or
rights to acquire shares or following capitalization of profits, (2) a merger, consolidation, or other business combination involving the issuance of Class B
common shares as full or partial consideration, or (3) an issuance of Class A common shares, whereby holders of the Class B common shares are entitled to
purchase a number of Class B common shares that would allow them to maintain their proportional ownership interests in Arco (following an offer by Arco to
each holder of Class B common shares to issue to such holder, upon the same economic terms and at the same price, such number of Class B common shares
as would ensure such holder may maintain a proportional ownership interest in Arco pursuant to Arco’s Articles of Association). In light of: (a) the above
provisions; (b) the fact that future transfers by holders of Class B common shares will generally result in those shares converting to Class A common shares,
subject to limited exceptions as provided in the Memorandum and Articles of Association; and (c) the ten-to-one voting ratio between our Class B common
shares and Class A common shares, means that holders of our Class B common shares will in many situations continue to maintain control of all matters
requiring shareholder approval. This concentration of ownership and voting power will limit or preclude your ability to influence corporate matters for the
foreseeable future. For more information see "—Preemptive or Similar Rights.”
Arco’s Articles of Association also provide that the issuance of non-voting common shares requires the affirmative vote of a majority of the of then-
outstanding Class A common shares.
Fiscal Year
Arco’s fiscal year begins on January 1 of each year and ends on December 31 of the same year.
Voting Rights
The holders of the Class A common shares and Class B common shares have identical rights, except that (i) the holder of Class B common shares is
entitled to 10 votes per share, whereas holders of Class A common shares are entitled to one vote per share, (ii) Class B common shares have certain
conversion rights and (iii) the holder of Class B common shares is entitled to maintain a proportional ownership interest in the event that additional Class A
common shares are issued. For more information see "—Preemptive or Similar Rights” and "—Conversion.” The holders of Class A common shares and Class
B common shares vote together as a single class on all matters (including the election of directors) submitted to a vote of shareholders, except as provided
below and as otherwise required by law.
Arco’s Articles of Association provide as follows regarding the respective rights of holders of Class A common shares and Class B common shares:
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(i) class consents from the holders of Class A common shares or Class B common shares, as applicable, shall be required for any variation to the rights
attached to their respective class of shares, however, the Directors may treat any two or more classes of shares as forming one class if they consider
that all such classes would be affected in the same way by the proposal;
(ii) the rights conferred on holders of Class A common shares shall not be deemed to be varied by the creation or issue of further Class B common shares
and vice versa; and
(iii) the rights attaching to the Class A common shares and the Class B common shares shall not be deemed to be varied by the creation or issue of shares
with preferred or other rights, including, without limitation, shares with enhanced or weighted voting rights.
As set forth in the Articles of Association, the holders of Class A common shares and Class B common shares, respectively, do not have the right to vote
separately if the number of authorized shares of such class is increased or decreased. Rather, the number of authorized Class A common shares and Class B
common shares may be increased or decreased (but not below the number of shares of such class then outstanding) by the affirmative vote of the holders of a
majority of the voting power of the issued and outstanding Class A common shares and Class B common shares, voting together in a general meeting.
Preemptive or Similar Rights
The Class A common shares and Class B common shares are not entitled to preemptive rights upon transfer and are not subject to conversion (except as
described below under "—Conversion”), redemption or sinking fund provisions.
The Class B common shares are entitled to maintain a proportional ownership interest in the event that additional Class A common shares are issued. As
such, except for certain exceptions, if Arco issues Class A common shares, it must first make an offer to each holder of Class B common shares to issue to
such holder, upon the same economic terms and at the same price, such number of Class B common shares as would ensure such holder may maintain a
proportional ownership interest in Arco. This right to maintain a proportional ownership interest may be waived by the holders of a majority of the Class B
common shares.
Conversion
The outstanding Class B common shares are convertible at any time as follows: (1) at the option of the holder, a Class B common share may be converted
at any time into one Class A common share or (2) upon the election of the holders of a majority of the then outstanding Class B common shares, all
outstanding Class B common shares may be converted into a like number of Class A common shares. In addition, each Class B common share will convert
automatically into one Class A common share upon any transfer, whether or not for value, except for certain transfers described in the Articles of Association,
including transfers to affiliates, transfers to and between the Founding Shareholders, their family members and their respective heirs and successors, trusts
solely for the benefit of the shareholder or their affiliates, and partnerships, corporations and other entities exclusively owned by the shareholder or their
affiliates and certain transfers to organizations that are exempt from taxation under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended.
Furthermore, each Class B common share will convert automatically into one Class A common share and no Class B common shares will be issued thereafter if,
at any time, the total number of the issued and outstanding Class B common shares is less than 10% of the total number of shares outstanding.
No class of Arco’s common shares may be subdivided or combined unless the other class of common shares is concurrently subdivided or combined in
the same proportion and in the same manner.
Equal Status
Except as expressly provided in Arco’s Articles of Association, Class A common shares and Class B common shares have the same rights and privileges
and rank equally, share ratably and are identical in all respects as to all matters. In the event of any merger, consolidation, scheme, arrangement or other
business combination requiring the approval of our shareholders entitled to vote thereon (whether or not Arco is the surviving entity), the holders of Class A
common shares shall have the right to receive, or the right to elect to receive, the same form of consideration as the holders of Class B common shares, and
the holders of Class A common shares shall
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have the right to receive, or the right to elect to receive, at least the same amount of consideration on a per share basis as the holders of Class B common
shares. In the event of any (1) tender or exchange offer to acquire any Class A common shares or Class B common shares by any third-party pursuant to an
agreement to which Arco is a party, or (2) any tender or exchange offer by Arco to acquire any Class A common shares or Class B common shares, the holders
of Class A common shares shall have the right to receive, or the right to elect to receive, the same form of consideration as the holders of Class B common
shares, and the holders of Class A common shares shall have the right to receive, or the right to elect to receive, at least the same amount of consideration on
a per share basis as the holders of Class B common shares.
Record Dates
For the purpose of determining shareholders entitled to notice of, or to vote at any general meeting of shareholders or any adjournment thereof, or
shareholders entitled to receive dividend or other distribution payments, or in order to make a determination of shareholders for any other purpose, Arco’s
board of directors may set a record date which shall not exceed forty (40) clear days prior to the date where the determination will be made.
General Meetings of Shareholders
As a condition of admission to a shareholders’ meeting, a shareholder must be duly registered as a shareholder of Arco at the applicable record date for
that meeting and, in order to vote, all calls or installments then payable by such shareholder to Arco in respect of the shares that such shareholder holds must
have been paid.
Subject to any special rights or restrictions as to voting then attached to any shares, at any general meeting every shareholder who is present in person
or by proxy (or, in the case of a shareholder being a corporation, by its duly authorized representative not being himself or herself a shareholder entitled to
vote) shall have one vote per Class A common share and 10 votes per Class B common share.
As a Cayman Islands exempted company, Arco is not obliged by the Companies Act to call annual general meetings; however, the Articles of
Association provide that in each year the company will hold an annual general meeting of shareholders, at a time determined by the board of directors,
provided that the board of directors of Arco has the discretion whether or not to hold an annual general meeting in 2021. For the annual general meeting of
shareholders, the agenda will include, among other things, the presentation of the annual accounts and the report of the directors. In addition, the agenda for
an annual general meeting of shareholders will only include such items as have been included therein by the board of directors.
Also, Arco may, but is not required to (unless required by the laws of the Cayman Islands), hold extraordinary general meetings during the year. General
meetings of shareholders are generally expected to take place in São Paulo, Brazil, but may be held elsewhere if the directors so decide.
The Companies Act provides shareholders a limited right to request a general meeting and does not provide shareholders with any right to put any
proposal before a general meeting in default of a company’s Articles of Association. However, these rights may be provided in a company’s Articles of
Association. Arco’s Articles of Association provide that upon the requisition of one or more shareholders representing not less than one-third of the voting
rights entitled to vote at general meetings, the board will convene an extraordinary general meeting and put the resolutions so requisitioned to a vote at such
meeting. The Articles of Association provide no other right to put any proposals before annual general meetings or extraordinary general meetings.
Subject to regulatory requirements, the annual general meeting and any extraordinary general meetings must be called by not less than ten (10) clear days’
notice prior to the relevant shareholders meeting and convened by a notice discussed below. Alternatively, upon the prior consent of all holders entitled to
receive notice, with regards to the annual general meeting, and the holders of 95% in par value of the shares entitled to attend and vote at an extraordinary
general meeting, that meeting may be convened by a shorter notice and in a manner deemed appropriate by those holders.
Arco will give notice of each general meeting of shareholders by publication on its website and in any other manner that it may be required to follow in
order to comply with Cayman Islands law, Nasdaq and SEC requirements. The holders of registered shares may
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be given notice of a shareholders’ meeting by means of letters sent to the addresses of those shareholders as registered in our shareholders’ register, or,
subject to certain statutory requirements, by electronic means.
Holders whose shares are registered in the name of DTC or its nominee, which we expect will be the case for all holders of Class A common shares,
will not be a shareholder or member of the company and must rely on the procedures of DTC regarding notice of shareholders’ meetings and the exercise of
rights of a holder of the Class A common shares.
A quorum for a general meeting consists of any one or more persons holding or representing by proxy not less than one-third of the aggregate voting
power of all shares in issue and entitled to vote upon the business to be transacted.
A resolution put to a vote at a general meeting shall be decided on a poll. An ordinary resolution to be passed by the shareholders at a general meeting
requires the affirmative vote of a simple majority of the votes cast by, or on behalf of, the shareholders entitled to vote, present in person or by proxy and
voting at the meeting. A special resolution requires the affirmative vote on a poll of no less than two-thirds of the votes cast by the shareholders entitled to
vote who are present in person or by proxy at a general meeting. Both ordinary resolutions and special resolutions may also be passed by a unanimous
written resolution signed by all the shareholders of our Company, as permitted by the Companies Act and our Articles of Association.
Pursuant to Arco’s Articles of Association, general meetings of shareholders are to be chaired by the chairman of our board of directors or in his absence
the vice-chairman of the board of directors. If the chairman or vice-chairman of our board of directors is absent, the directors present at the meeting shall
appoint one of them to be chairman of the general meeting. If neither the chairman nor another director is present at the general meeting within 15 minutes after
the time appointed for holding the meeting, the shareholders present in person or by proxy and entitled to vote may elect any one of the shareholders to be
chairman. The order of business at each meeting shall be determined by the chairman of the meeting, and he or she shall have the right and authority to
prescribe such rules, regulations and procedures and to do all such acts and things as are necessary or desirable for the proper conduct of the meeting,
including, without limitation, the establishment of procedures for the maintenance of order and safety, limitations on the time allotted to questions or
comments on the affairs of the Company, restrictions on entry to such meeting after the time prescribed for the commencement thereof, and the opening and
closing of the polls.
Liquidation Rights
If Arco is voluntarily wound up, the liquidator, after taking into account and giving effect to the rights of preferred and secured creditors and to any
agreement between Arco and any creditors that the claims of such creditors shall be subordinated or otherwise deferred to the claims of any other creditors
and to any contractual rights of set-off or netting of claims between Arco and any person or persons (including without limitation any bilateral or any multi-
lateral set-off or netting arrangements between the company and any person or persons) and subject to any agreement between Arco and any person or
persons to waive or limit the same, shall apply Arco’s property in satisfaction of its liabilities pari passu and subject thereto shall, subject to the rights
attaching to any share, distribute the property pari passu amongst the shareholders in proportion to the capital paid up at the commencement of the winding
up on the shares held by them respectively.
Changes to Capital
Pursuant to the Articles of Association, Arco may from time to time by ordinary resolution:
● increase its share capital by such sum, to be divided into shares of such amount, as the resolution shall prescribe;
● consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares;
● convert all or any of its paid-up shares into stock and reconvert that stock into paid-up shares of any denomination;
● subdivide its existing shares or any of them into shares of a smaller amount, provided that in the subdivision the proportion between the amount paid
and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the reduced share is derived; or
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● cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and diminish the
amount of its share capital by the amount of the shares so canceled.
Arco’s shareholders may by special resolution, subject to confirmation by the Grand Court of the Cayman Islands on an application by the Company for
an order confirming such reduction, reduce its share capital or any capital redemption reserve in any manner permitted by law.
In addition, subject to the provisions of the Companies Act and our Articles of Association, Arco may:
● issue shares on terms that they are to be redeemed or are liable to be redeemed;
● purchase its own shares (including any redeemable shares); and
● make a payment in respect of the redemption or purchase of its own shares in any manner authorized by the Companies Act, including out of its own
capital.
Transfer of Shares
Subject to any applicable restrictions set forth in the Articles of Association, any shareholder of Arco may transfer all or any of his or her common shares
by an instrument of transfer in the usual or common form or in the form prescribed by the Nasdaq or any other form approved by the Company’s board of
directors.
The Class A common shares are traded on the Nasdaq in book-entry form and may be transferred in accordance with Arco’s Articles of Association and
Nasdaq’s rules and regulations.
However, Arco’s board of directors may, in its absolute discretion, decline to register any transfer of any common share which is either not fully paid up
to a person of whom it does not approve or is issued under any share incentive scheme for employees which contains a transfer restriction that is still
applicable to such common share. The board of directors may also decline to register any transfer of any common share unless:
● a fee of such maximum sum as the Nasdaq may determine to be payable or such lesser sum as the board of directors may from time to time require is
paid to Arco in respect thereof;
● the instrument of transfer is lodged with Arco, accompanied by the certificate (if any) for the common shares to which it relates and such other
evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer;
● the instrument of transfer is in respect of only one class of shares;
● the instrument of transfer is properly stamped, if required;
● the common shares transferred are free of any lien in favor of Arco; and
● in the case of a transfer to joint holders, the transfer is not to more than four joint holders.
If the directors refuse to register a transfer they are required, within two months after the date on which the instrument of transfer was lodged, to send to
the transferee notice of such refusal.
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Share Repurchase
The Companies Act and the Articles of Association permit Arco to purchase its own shares, subject to certain restrictions. The board of directors may
only exercise this power on behalf of Arco, subject to the Companies Act, the Articles of Association and to any applicable requirements imposed from time
to time by the SEC, the Nasdaq, or by any recognized stock exchange on which our securities are listed.
Dividend Rights
See "Item 8A. Consolidated Statements and Other Financial Information—Dividends and Dividend Policy” for further information regarding dividend
rights.
Appointment, Disqualification and Removal of Directors
Arco is managed by its board of directors. The Articles of Association provide that, unless otherwise determined by a special resolution of shareholders,
the board of directors will be composed of four to 11 directors, with the number being determined by a majority of the directors then in office. There are no
provisions relating to retirement of directors upon reaching any age limit. The Articles of Association also provide that, while Arco’s shares are admitted to
trading on Nasdaq, the board of directors must always comply with the residency and citizenship requirements of the U.S. securities laws applicable to foreign
private issuers.
The Articles of Association provide that directors shall be elected by an ordinary resolution of our shareholders, which requires the affirmative vote of a
simple majority of the votes cast on the resolution by the shareholders entitled to vote who are present, in person or by proxy, at the meeting. Each director
shall be appointed and elected for such term as the resolution appointing him or her may determine or until his or her removal or vacation of office in
accordance with the Articles of Association.
Any vacancies on the board of directors that arise other than upon the removal of a director by resolution passed at a general meeting can be filled by the
remaining directors (notwithstanding that they may constitute less than a quorum). Any such appointment shall be as an interim director to fill such vacancy
until the next annual general meeting of shareholders.
Additions to the existing board (within the limits set pursuant to the Articles of Association) may be made by ordinary resolution of the shareholders.
Grounds for Removing a Director
A director may be removed with or without cause by ordinary resolution. The notice of general meeting must contain a statement of the intention to
remove the director and must be served on the director not less than ten calendar days before the meeting. The director is entitled to attend the meeting and
be heard on the motion for his removal.
The office of a director will be vacated automatically if he or she (1) becomes prohibited by law from being a director, (2) becomes bankrupt or makes an
arrangement or composition with his creditors, (3) dies or is in the opinion of all his co-directors, incapable by reason of mental disorder of discharging his
duties as director, (4) resigns his office by notice to us or (5) has for more than six months been absent without permission of the directors from meetings of
the board of directors held during that period, and the remaining directors resolve that his or her office be vacated.
Proceedings of the Board of Directors
The Articles of Association provide that Arco’s business is to be managed and conducted by the board of directors. The quorum necessary for the
board meeting shall be a simple majority of the directors then in office (subject to there being a minimum of two directors present) and business at any meeting
shall be decided by a majority of votes. In the case of an equality of votes, the chairman shall have a casting vote.
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Subject to the provisions of the Articles of Association, the board of directors may regulate its proceedings as they determine is appropriate. Board
meetings shall be held at least once every calendar quarter and shall take place either in São Paulo, Brazil or at such other place as the directors may determine.
Subject to the provisions of the Articles of Association, to any directions given by ordinary resolution of the shareholders and the listing rules of the
Nasdaq, the board of directors may from time to time at its discretion exercise all powers of Arco, including, subject to the Companies Act, the power to issue
debentures, bonds and other securities of the company, whether outright or as collateral security for any debt, liability or obligation of our company or of any
third-party.
Inspection of Books and Records
Holders of Arco shares will have no general right under Cayman Islands law to inspect or obtain copies of the list of shareholders or corporate records of
the Company. However, the board of directors may determine from time to time whether and to what extent Arco’s accounting records and books shall be
open to inspection by shareholders who are not members of the board of directors. Notwithstanding the above, the Articles of Association provide
shareholders with the right to receive annual financial statements. Such right to receive annual financial statements may be satisfied by publishing the same
on the company’s website or filing such annual reports as we are required to file with the SEC.
Register of Shareholders
The Class A common shares are held through DTC, and DTC or Cede & Co., as nominee for DTC, will be recorded in the shareholders’ register as the
holder of our Class A common shares.
Under Cayman Islands law, Arco must keep a register of shareholders that includes:
● the names and addresses of the shareholders, a statement of the shares held by each member, and of the amount paid or agreed to be considered as
paid, on the shares of each member;
● whether voting rights attach to the shares in issue;
● the date on which the name of any person was entered on the register as a member; and
● the date on which any person ceased to be a member.
Under Cayman Islands law, the register of shareholders of Arco is prima facie evidence of the matters set out therein (i.e., the register of shareholders will
raise a presumption of fact on the matters referred to above unless rebutted) and a shareholder registered in the register of shareholders is deemed as a matter
of Cayman Islands law to have prima facie legal title to the shares as set against his or her name in the register of shareholders. Once the register of
shareholders has been updated, the shareholders recorded in the register of shareholders should be deemed to have legal title to the shares set against their
name.
However, there are certain limited circumstances where an application may be made to a Cayman Islands court for a determination on whether the register
of members reflects the correct legal position. Further, the Cayman Islands court has the power to order that the register of members maintained by a company
should be rectified where it considers that the register of members does not reflect the correct legal position. If an application for an order for rectification of
the register of members were made in respect of our ordinary shares, then the validity of such shares may be subject to re-examination by a Cayman Islands
court.
Exempted Company
Arco is an exempted company with limited liability under the Companies Act. The Companies Act distinguishes between ordinary resident companies and
exempted companies. Any company that is registered in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be
registered as an exempted company. The requirements for an exempted company are essentially the same as for an ordinary company except for the
exemptions and privileges listed below:
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● an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies;
● an exempted company’s register of shareholders is not open to inspection;
● an exempted company does not have to hold an annual general meeting;
● an exempted company may issue shares with no par value;
● an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for 20 years in
the first instance);
● an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands;
● an exempted company may register as a limited duration company; and
● an exempted company may register as a segregated portfolio company.
"Limited liability” means that the liability of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company (except in
exceptional circumstances, such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in
which a court may be prepared to pierce or lift the corporate veil).
Arco is subject to reporting and other informational requirements of the Exchange Act, as applicable to foreign private issuers. Except as otherwise
disclosed in this annual report, Arco intends to continue to comply with the Nasdaq rules in lieu of following home country practice.
Anti-Takeover Provisions in our Articles of Association
Some provisions of the Articles of Association may discourage, delay or prevent a change in control of Arco or management that shareholders may
consider favorable. In particular, the capital structure of Arco concentrates ownership of voting rights in the hands of the Founding Shareholders. These
provisions, which are summarized below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also
designed to encourage persons seeking to acquire control of Arco to first negotiate with the board of directors. However, these provisions could also have
the effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price of
the Class A common shares that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect of preventing
changes in the management of Arco. It is possible that these provisions could make it more difficult to accomplish transactions that shareholders may
otherwise deem to be in their best interests.
Two Classes of Common Shares
The Class B common shares of Arco are entitled to 10 votes per share, while the Class A common shares are entitled to one vote per share. Since it owns
of all of the Class B common shares of Arco, the Founding Shareholders currently have the ability to elect all directors and to determine the outcome of most
matters submitted for a vote of shareholders. This concentrated voting control could discourage others from initiating any potential merger, takeover, or other
change of control transaction that other shareholders may view as beneficial.
So long as the Founding Shareholders have the ability to determine the outcome of most matters submitted to a vote of shareholders, third parties may be
deterred in their willingness to make an unsolicited merger, takeover, or other change of control proposal, or to engage in a proxy contest for the election of
directors. As a result, the fact that Arco has two classes of common shares may have the effect of depriving you as a holder of Class A common shares of an
opportunity to sell your Class A common shares at a premium over prevailing market prices and make it more difficult to replace the directors and management
of Arco.
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Preferred Shares
Arco’s board of directors is given wide powers to issue one or more classes or series of shares with preferred rights. Such preferences may include, for
example, dividend rights, conversion rights, redemption privileges, enhanced voting powers and liquidation preferences.
Despite the anti-takeover provisions described above, under Cayman Islands law, Arco’s board of directors may only exercise the rights and powers
granted to them under the Articles of Association, for what they believe in good faith to be in the best interests of Arco.
Protection of Non-Controlling Shareholders
The Grand Court of the Cayman Islands may, on the application of shareholders holding not less than one-fifth of the shares of Arco in issue, appoint an
inspector to examine the Company’s affairs and report thereon in a manner as the Grand Court shall direct.
Subject to the provisions of the Companies Act, any shareholder may petition the Grand Court of the Cayman Islands which may make a winding-up
order, if the court is of the opinion that this winding up is just and equitable.
Notwithstanding the U.S. securities laws and regulations that are applicable to Arco, general corporate claims against Arco by its shareholders must, as a
general rule, be based on the general laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by
Arco’s Articles of Association.
The Cayman Islands courts ordinarily would be expected to follow English case law precedents, which permit a minority shareholder to commence a
representative action against Arco, or derivative actions in Arco’s name, to challenge (1) an act which is ultra vires or illegal, (2) an act which constitutes a
fraud against the minority and the wrongdoers themselves control Arco, and (3) an irregularity in the passing of a resolution that requires a qualified (or
special) majority.
Registration Rights and Restricted Shares
Although no shareholders of Arco have formal registration rights, they or entities controlled by them or their permitted transferees will be able to sell their
shares in the public market from time to time pursuant to an exemption from registration, subject to certain limitations on the timing, amount and method of
those sales imposed by regulations promulgated by the SEC.
C. Material contracts
See "Item 7. Major Shareholders and Related Party Transactions—B. Related party transactions.” Except as otherwise disclosed in this annual report on
Form 20-F (including the Exhibits), we are not currently, and have not been in the last two years, party to any material contract, other than contracts entered
into in the ordinary course of business.
D. Exchange controls
The Cayman Islands currently has no exchange control restrictions.
E. Taxation
The following summary contains a description of certain Cayman Islands and U.S. federal income tax consequences of the acquisition, ownership and
disposition of our Class A common shares. It does not purport to be a comprehensive description of all the tax considerations that may be relevant to a
decision to purchase the Class A common shares, is not applicable to all categories of investors, some of which may be subject to special rules, and does not
address all of the Cayman Islands and U.S. federal income tax considerations applicable to any particular holder. The summary is based upon the tax laws of
the Cayman Islands and regulations thereunder and on the tax laws of United States and regulations thereunder as of the date hereof, which are subject to
change.
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Prospective purchasers of our Class A common shares should consult their own tax advisors about the particular Cayman Islands and U.S. federal, state,
local and other tax consequences to them of the acquisition, ownership and disposition of our Class A common shares.
Cayman Islands Tax Considerations
The Cayman Islands laws currently levy no taxes on individuals or corporations based upon profits, income, gains or appreciation and there is no taxation
in the nature of inheritance tax or estate duty or withholding tax applicable to us or to any holder of Class A common shares. There are no other taxes likely to
be material to us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after
execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares of Cayman Islands
companies except those which hold interests in land in the Cayman Islands. The Cayman Islands is not party to any double tax treaties which are applicable to
any payments made by or to our company. There are no exchange control regulations or currency restrictions in the Cayman Islands.
As a Cayman Islands exempted company with limited liability, we have received an undertaking as to tax concessions pursuant to Section 6 of the Tax
Concessions Act (As Revised). This undertaking provides that, for a period of 20 years from the date of issue of the undertaking (April 16, 2018), no law
thereafter enacted in the Cayman Islands imposing any taxes to be levied on profits, income, gains or appreciation will apply to us or our operations.
Payments of dividends and capital in respect of our Class A common shares will not be subject to taxation in the Cayman Islands and no withholding will
be required on the payment of a dividend or capital to any holder of our Class A common shares, nor will gains derived from the disposal of our Class A
common shares be subject to Cayman Islands income or corporation tax.
There is no income tax treaty or convention currently in effect between the United States and the Cayman Islands.
Material U.S. Federal Income Tax Considerations for U.S. Holders
The following summary describes the material U.S. federal income tax consequences of the ownership and disposition of our Class A common shares, but
it does not purport to be a comprehensive description of all of the tax considerations that may be relevant to a particular person’s decision to hold such
securities.
This summary applies only to U.S. Holders (as defined below) that hold our Class A common shares as capital assets for tax purposes. In addition, it does
not describe all of the tax consequences that may be relevant in light of a U.S. Holder’s particular circumstances, including alternative minimum tax
consequences, the potential application of the provisions of the Internal Revenue Code of 1986, as amended (the "Code”), known as the Medicare
contribution tax, and tax consequences applicable to U.S. Holders subject to special rules, such as:
● certain financial institutions;
● insurance companies;
● real estate investment trusts or regulated investment companies;
● dealers or traders in securities that use a mark-to-market method of tax accounting;
● persons holding common shares as part of a hedging transaction, straddle, wash sale, conversion transaction or other integrated transaction or
persons entering into a constructive sale with respect to the common shares;
● persons whose functional currency for U.S. federal income tax purposes is not the U.S. dollar;
● tax-exempt entities, including an "individual retirement account” or "Roth IRA;”
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● persons that own or are deemed to own ten percent or more of our Class A common shares, by vote or value;
● persons holding our Class A common shares in connection with a trade or business conducted outside of the United States; or
● partnerships or other entities or arrangements treated as partnerships for U.S. federal income tax purposes.
If an entity that is classified as a partnership for U.S. federal income tax purposes holds our Class A common shares, the U.S. federal income tax treatment
of a partner will generally depend on the status of the partner and the activities of the partnership. Partnerships holding our Class A common shares and
partners in such partnerships should consult their tax advisers as to the particular U.S. federal income tax consequences of owning and disposing of the Class
A common shares.
This discussion is based on the Code, administrative pronouncements, judicial decisions, final, temporary and proposed Treasury regulations, all as of
the date hereof, any of which is subject to change or differing interpretations, possibly with retroactive effect.
A "U.S. Holder” is a holder who, for U.S. federal income tax purposes, is a beneficial owner of our Class A common shares and is:
● an individual that is a citizen or resident of the United States;
● a corporation, or other entity taxable as a corporation, created or organized in or under the laws of the United States, any state therein or the District
of Columbia; or
● an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source.
U.S. Holders should consult their tax advisors concerning the U.S. federal, state, local and non-U.S. tax consequences of owning and disposing of our
Class A common shares in their particular circumstances.
This discussion assumes that we are not, and will not become, a passive foreign investment company (a "PFIC”), as described below.
Taxation of Distributions
As discussed under "Item 8. Financial Information—A. Consolidated Statements and Other Financial Information—Dividends and Dividend Policy”, we
do not currently intend to pay dividends. In the event that we do pay dividends, and subject to the discussion below under "—Passive Foreign Investment
Company Rules,” distributions paid on our Class A common shares, other than certain pro rata distributions of common shares, will be treated as dividends to
the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). Because we do not maintain
calculations of our earnings and profits under U.S. federal income tax principles, we expect that distributions generally will be reported to U.S. Holders as
dividends. Subject to applicable limitations, dividends paid to certain non-corporate U.S. Holders may be eligible for taxation as "qualified dividend income”
and therefore may be taxable at rates applicable to long-term capital gains so long as our Class A common shares are listed and trade on Nasdaq or are readily
tradable on another established securities market in the United States. U.S. Holders should consult their tax advisors regarding the availability of the reduced
tax rate on dividends in their particular circumstances.
The amount of the dividend will generally be treated as foreign-source dividend income to U.S. Holders and will not be eligible for the dividends-received
deduction generally available to U.S. corporations under the Code. Dividends will be included in a U.S. Holder’s income on the date of the U.S. Holder’s
receipt of the dividend.
Sale or Other Disposition of Common Shares
Subject to the discussion below under "—Passive Foreign Investment Company Rules,” for U.S. federal income tax purposes, gain or loss realized on the
sale or other disposition of our Class A common shares will be capital gain or loss and will be long-term capital gain or loss if the U.S. Holder held the Class A
common shares for more than one year. The amount of the gain or loss will
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equal the difference between the U.S. Holder’s tax basis in the Class A common shares disposed of and the amount realized on the disposition, in each case as
determined in U.S. dollars. This gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. The deductibility of capital losses is
subject to various limitations.
Passive Foreign Investment Company Rules
A non-U.S. corporation will be a PFIC for any taxable year in which either (i) 75% or more of its gross income consists of "passive income,” or (ii) 50% or
more of the average quarterly value of its assets consist of assets that produce, or are held for the production of, "passive income.” For this purpose, subject
to certain exceptions, passive income includes interest, dividends, rents, and gains from transactions in commodities. A non-U.S. corporation will be treated as
owning its proportionate share of the assets and earning its proportionate share of the income of any other corporation in which it owns, directly or indirectly,
at least 25% (by value) of the stock.
Based on our current operations, income, assets and certain estimates and projections, including as to the relative values of our assets, we believe that
we were not a PFIC for U.S. federal income tax purposes for our taxable year ended December 31, 2021. However, because PFIC status depends on the
composition of a company’s income and assets and the market value of its assets from time to time, there can be no assurance that we will not be a PFIC for
any taxable year. If we were a PFIC for any year during which a U.S. Holder holds our Class A common shares, we generally would continue to be treated as a
PFIC with respect to that U.S.
Holder for all succeeding years during which the U.S. Holder holds the Class A common shares, even if we ceased to meet the threshold requirements for
PFIC status.
If we were a PFIC for any taxable year during which a U.S. Holder held our Class A common shares (assuming such U.S. Holder has not made a timely
election described below), gain recognized by a U.S. Holder on a sale or other disposition (including certain pledges) of the Class A common shares would be
allocated ratably over the U.S. Holder’s holding period for the Class A common shares. The amounts allocated to the taxable year of the sale or other
disposition and to any year before we became a PFIC would be taxed as ordinary income. The amount allocated to each other taxable year would be subject to
tax at the highest rate in effect for individuals or corporations, as appropriate, for that taxable year, and an interest charge would be imposed on the tax on
such amount. Further, to the extent that any distribution received by a U.S. Holder on its Class A common shares exceeds 125% of the average of the annual
distributions on such common shares received during the preceding three years or the U.S. Holder’s holding period, whichever is shorter, that distribution
would be subject to taxation in the same manner as gain, described immediately above. If we are a PFIC in any year, certain elections may be available that
would result in alternative tax consequences (such as mark-to-market treatment) of owning and disposing the Class A common shares. U.S. Holders should
consult their tax advisers to determine whether any of these elections would be available and, if so, what the consequences of the alternative treatments
would be in their particular circumstances.
In addition, if we were a PFIC or, with respect to a particular U.S. Holder, were treated as a PFIC for the taxable year in which we paid a dividend or for the
prior taxable year, the preferential dividend rates discussed above with respect to dividends paid to certain non-corporate U.S. Holders would not apply.
If a U.S. Holder owns Class A common shares during any year in which we are a PFIC, the holder generally must file an annual report containing such
information as the U.S. Treasury may require on IRS Form 8621 (or any successor form) with respect to us, generally with the holder’s federal income tax return
for that year.
U.S. Holders should consult their tax advisors concerning our potential PFIC status and the potential application of the PFIC rules.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made within the United States or through certain U.S.-related financial intermediaries generally are
subject to information reporting, and may be subject to backup withholding, unless (i) the U.S. Holder is a
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corporation or other exempt recipient or (ii) in the case of backup withholding, the U.S. Holder provides a correct taxpayer identification number and certifies
that it is not subject to backup withholding.
Backup withholding is not an additional tax. The amount of any backup withholding from a payment to a U.S. Holder will be allowed as a credit against
such holder’s U.S. federal income tax liability and may entitle it to a refund, provided that the required information is timely furnished to the IRS. U.S. Holders
should consult their tax advisers regarding the application of the U.S. information reporting and backup withholding rules.
Information with Respect to Foreign Financial Assets
Certain U.S. Holders who are individuals (and, under recent Treasury regulations, certain entities) may be required to report information on their U.S.
federal income tax returns relating to an interest in our common shares, subject to certain exceptions (including an exception for common shares held in
accounts maintained by certain U.S. financial institutions). U.S. Holders should consult their tax advisers regarding the effect, if any, of this requirement on
their ownership and disposition of the common shares.
F. Dividends and paying agents
Not applicable.
G. Statement by experts
Not applicable.
H. Documents on display
We are subject to the informational requirements of the Exchange Act. Accordingly, we are required to file reports and other information with the SEC,
including annual reports on Form 20-F and reports on Form 6-K. You may inspect and copy reports and other information filed with the SEC at the Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC
at 1-800-SEC-0330. In addition, the SEC maintains an internet website that contains reports and other information about issuers, like us, that file electronically
with the SEC. The address of that website is www.sec.gov.
I. Subsidiary information
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks associated with foreign exchange and interest rates. In accordance with our policies, we seek to manage our exposure to
these various market-based risks.
We monitor market, credit and operational risks in line with the objectives in capital management, supported by the oversight of our Board of Directors, in
decisions related to capital management and to ensure their consistency with our objectives and assessment of risks. Information relating to quantitative and
qualitative disclosures about these market risks is described below.
Foreign Exchange Risk
The Company’s exposure to foreign currency risk. As of December 31, 2021, we have cash and cash equivalents and financial investments and
borrowings denominated in U.S. dollars in the amount of R$0.2 million and R$654.9 million, respectively. See note 27 to our audited consolidated financial
statements for a sensitivity analysis of the impact of a hypothetical 10% change in the exchange rate variation on our cash and cash equivalents and financial
investments as of December 31, 2021.
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Liquidity Risk
We regularly review the liquidity risk and maintain appropriate reserves, including bank credit facilities with first tier financial institutions. We also
continuously monitor projected and actual cash flows and the combination of maturity profiles of the financial assets and liabilities.
The main requirements for financial resources used by us arise from the need to make payments for printing educational content, freight expenses,
operating expenses, labor and social obligations and other operating disbursements. See "Item 5. F—Tabular disclosure of contractual obligations” for a table
summarizing our contractual obligations as of December 31, 2021.
Financial Counterparty Risk
The financial counterparty risk arises from the possibility that we may incur losses due to the default of our counterparties. We adopt as practice the
analysis of the financial and equity situation of our counter parts in order to control this risk.
Counterparty credit limits, which take published credit ratings and other factors into account, are set to cover our total aggregate exposure to a single
financial institution. Exposures and limits applicable to each financial institution are approved by our treasury within guidelines approved by the board and
are reviewed on a regular basis.
Interest Rate Risk
Interest rate risk represents the chance that the fair value or future cash flows of a financial instrument will fluctuate due to changes in market interest
rates. Our exposure to this risk relates primarily to our investments with floating interest rates. We are primarily exposed to fluctuations in CDI interest rates on
financial investments. Our exposure to cash, bank deposits and cash equivalents and financial investments indexed to the CDI totaled R$3,209.4 million as of
December 31, 2021. See note 27 to our audited consolidated financial statements for a sensitivity analysis of the impact of a hypothetical 10% change in the
CDI on our cash and cash equivalents and financial investments as of December 31, 2021.
For further information on our market risks, see note 27 to our audited consolidated financial statements.
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt securities
Not applicable.
B. Warrants and rights
Not applicable.
C. Other securities
Not applicable.
D. American depositary shares
Not applicable.
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ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
PART II
Defaults
No matters to report.
Arrears and delinquencies
No matters to report.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS
A. Material modifications to instruments
Not applicable.
B. Material modifications to rights
Not applicable.
C. Withdrawal or substitution of assets
Not applicable.
D. Change in trustees or paying agents
Not applicable.
E. Use of proceeds
On September 25, 2018, the registration statement on Form F-1 (File No 333-7007) relating to our initial public offering of our class A common shares was
declared effective by the SEC. On September 25, 2018, we commenced our initial public offering. On September 28, 2018 we closed our initial public offering,
pursuant to which we issued and sold 12,777,777 Class A common shares. Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC, Itau BBA USA Securities,
Inc. and Merrill Lynch, Pierce, Fenner & Smith Incorporated acted as the representatives of the underwriters in our initial public offering. The 12,777,777
registered Class A common shares were sold to the public at a price of US$17.50 per Class A common share, for an aggregate price of US$223,611,098 (which
included the full exercise of the option to purchase additional shares by the underwriters). We incurred approximately US$6.6 million in expenses related to our
initial public offering and paid approximately US$13.4 million in underwriting discounts and commissions.
On October 21, 2019, a shelf registration statement on Form F-3 (File No 333-234215) was declared effective by the SEC. On October 25, 2019, we filed with
the SEC the final prospectus supplement related to our follow-on public offering of our class A common shares. Goldman Sachs & Co. LLC, Morgan Stanley &
Co. LLC and Itau BBA USA Securities, Inc. acted as the representatives of the underwriters in this offering. In connection with this offering, we issued and
sold 3,450,656 Class A common shares and the selling shareholders offered and sold an additional 4,268,847 Class A common shares to the public at a price of
US$43.00 per Class A common shares, for an aggregate price of US$331,938,629. We received net proceeds of US$143.9 million, after deducting USS$3.7
million in underwriting discounts and commissions. On November 26, 2019, an additional 661,112 Class A common shares were sold by General Atlantic Arco
(Bermuda), L.P. following the exercise by the underwriters of their option to purchase additional shares.
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On September 8, 2020, we filed with the SEC the final prospectus supplement (File No 333-234215) related to a public offering of our class A common
shares. Goldman Sachs & Co. LLC, Morgan Stanley & Co. LLC and Itau BBA USA Securities, Inc. acted as the representatives of the underwriters in our
follow-on. In connection with the follow-on, we issued and sold 2,500,000 Class A common shares to the public at a price of US$44.80 per Class A common
shares, for an aggregate price of US$112,000,000. We received net proceeds of US$109.8 million, after deducting USS$2.2 million in underwriting discounts and
commissions.
ITEM 15. CONTROLS AND PROCEDURES
A. Disclosure controls and procedures
We have evaluated, with the participation of our chief executive officer and chief financial officer, the effectiveness of our "disclosure controls and
procedures,” as such term is defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act, as of December 31, 2021. There are inherent limitations to the
effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the
controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control
objectives. Based upon our evaluation, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were
effective as of December 31, 2021 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is
accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
B. Management’s annual report on internal control over financial reporting
Management is responsible for establishing and maintaining adequate "internal control over financial reporting,” as such term is defined in Rule 13a-15(f)
of the Exchange Act. Internal control over financial reporting is a process designed by, or under the supervision of, our chief executive officer and chief
financial officer and effected by our Board of Directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatement. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2021. In making its assessment of internal
control over financial reporting, management used the criteria described in Internal Control—Integrated Framework (2013) issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility
that a material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
As indicated in the accompanying Report of Management on Arco Platform Limited’s Internal Control Over Financial Reporting included under Item 18 in
this annual report on Form 20-F on page F-2, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did
not include the internal controls of MeSalva!, Eduqo, Edupass and P2D, which are included in the 2021 consolidated financial statements of the Company.
Collectively, MeSalva!, Eduqo, Edupass and P2D constituted less than 3% of the Company’s total assets as of December 31, 2021 and less than 5% of the
Company’s total revenues for the year ended December 31, 2021.
C. Attestation report of the registered public accounting firm
The effectiveness of internal control over financial reporting as of December 31, 2021, has been audited by Ernst & Young Auditores Independentes S.S.,
an independent registered public accounting firm, as stated in its report which is included under Item 18
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in this annual report on Form 20-F on page F-2. EY’s audit of internal control over financial reporting of the Company did not include an evaluation of the
internal control over financial reporting of MeSalva!, Eduqo, Edupass and P2D.
D. Changes in internal control over financial reporting
There has been no change in our internal control over financial reporting during 2021 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
ITEM 16. RESERVED
ITEM 16A. AUDIT COMMITTEE FINANCIAL EXPERT
The audit committee, which consists of Edward Ruiz, Beatriz Amary and Carla Schmitzberger, assists our board of directors in overseeing our accounting
and financial reporting processes and the audits of our financial statements. In addition, the audit committee is directly responsible for the appointment,
compensation, retention and oversight of the work of our independent registered public accounting firm. Edward Ruiz serves as Chairman of the audit
committee. The audit committee consists exclusively of members of our board of directors who are financially literate, and Edward Ruiz is considered an "audit
committee financial expert” as defined by the SEC. Our board of directors has determined that Edward Ruiz, Beatriz Amary and Carla Schmitzberger satisfy the
"independence” requirements set forth in Rule 10A-3 under the Exchange Act. For more information, see "Item 6. Directors, Senior Management and
Employees—C. Board Practices—Committees of the Board of Directors—Audit Committee.”
ITEM 16B. CODE OF ETHICS
On September 11, 2018, our Board of Directors adopted a code of business conduct and ethics (the "Code of Ethics”) applicable to the board of directors
and all employees of Arco. On November 21, 2019, our Board of Directors approved an amendment to the Code of Ethics applicable to the board of directors
and all employees of Arco. An English translation of the Code of Ethics was included in the 2019 annual report as Exhibit 14.1.
Since its effective date on September 11, 2018, we have not waived compliance with the Code of Ethics.
ITEM 16C. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Audit and Non-Audit Fees
The following table sets forth the fees billed to us by our independent registered public accounting firm during the years ended December 31, 2021 and
2020. Our independent registered public accounting firm was Ernst & Young Auditores Independentes S.S. for the years ended December 31, 2021 and 2020.
Audit fees(1)
Total
2021
2020
(in thousands of reais)
7,266.4
7,266.4
10,291.6
10,291.6
(1) "Audit fees” include fees for (i) the audit of the annual consolidated financial statements, prepared in accordance with IFRS, as issued by the IASB and
internal control over financial reporting as of December 31, 2021; (ii) the audit of financial statements of the Company’s subsidiaries; (iii) the review of our
interim financial statements for the three-month period ended March 31, 2021, for the six-month periods ended June 30, 2021 and for the nine-month
periods September 30, 2021;
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ITEM 16D. EXEMPTIONS FROM THE LISTING STANDARDS FOR AUDIT COMMITTEES
Under the listed company audit committee rules of Nasdaq and the SEC, we must comply with Exchange Act Rule 10A-3, which requires that we establish
an audit committee composed of members of the Board of Directors that meets specified requirements. The composition of our audit committee complies with
the requirements of Nasdaq rules.
ITEM 16E. PURCHASES OF EQUITY SECURITIES BY THE ISSUER AND AFFILIATED PURCHASERS
On January 6, 2021, our Board of Directors approved the Repurchase Program, by which we may repurchase up to 500,000 of our outstanding Class A
common shares in the open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on January 6, 2021,
continuing until the earlier of the completion of the repurchase or January 6, 2023, depending upon market conditions. On March 31, 2021, our Board of
Directors approved the increase of the share repurchase limit of our Repurchase Program to up to 2.5 million of our outstanding Class A common shares in the
open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on March 31, 2021. Our Board of Directors will
review the Repurchase Program periodically and may authorize adjustments to its terms and size or suspend or discontinue the Repurchase Program. We
expect to use our existing funds to fund repurchases made under the Repurchase Program.
January 2021
February 2021
March 2021
April 2021
May 2021
June 2021
July 2021
August 2021
September 2021
October 2021
November 2021
December 2021
January 2022
February 2022
March 2022
Total
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs(1)
Maximum Value of
Shares that May
Yet Be Purchased
Under the Plans or
Programs
Average Price Paid
per Share (US$)
33.6778
36.2643
–
27.9866
–
–
–
23.6687
22.0991
18.6670
17.9247
–
20.1357
19.5137
18.2050
23.7738
70,839
205,742
–
362,621
–
–
–
185,161
66,628
312,000
277,070
–
66,153
232,565
40,000
1,818,779
429,161
223,419
233,419
1,860,798
1,860,798
1,860,798
1,860,798
1,675,637
1,609,009
1,297,009
1,019,939
1,019,939
953,786
721,221
681,221
681,221
Total Number of
Shares Purchased
70,839
205,742
—
362,621
–
–
–
185,161
66,628
312,000
277,070
–
66,153
232,565
40,000
1,818,779
(1) The column includes all the shares repurchased as a part of the Repurchase Program announced on January 6, 2021, as further described above. As of the
date of this annual report, we had purchased an aggregate of 1,818,779 Class A common shares for a total of approximately US$43.2 million under the
Repurchase Program.
ITEM 16F. CHANGE IN REGISTRANT’S CERTIFYING ACCOUNTANT
Not applicable.
ITEM 16G. CORPORATE GOVERNANCE
Foreign Private Issuer Status
Nasdaq listing rules include certain accommodations in the corporate governance requirements that allow foreign private issuers, such as us, to follow
"home country” corporate governance practices in lieu of the otherwise applicable corporate governance
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standards of Nasdaq. The application of such exceptions requires that we disclose each noncompliance with Nasdaq listing rules that we do not follow and
describe the Cayman Islands corporate governance practices we do follow in lieu of the relevant Nasdaq corporate governance standard. As a foreign private
issuer, we currently rely, and will continue to rely, on the foreign private issuer exemption with respect to the following rules:
● Nasdaq Rule 5605(b), which requires that independent directors comprise a majority of a company’s board of directors. As allowed by the laws of the
Cayman Islands, independent directors do not comprise a majority of our board of directors.
● Nasdaq Rule 5605(e)(1), which requires that a company have a nominations committee comprised solely of "independent directors” as defined by
Nasdaq. As allowed by the laws of the Cayman Islands, we do not have a nominations committee nor do we have any current intention to establish
one.
● Nasdaq Rule 5605(d) & (e), which require that compensation for our executive officers and selection of our director nominees be determined by a
majority of independent directors. As allowed by the laws of the Cayman Islands, we do not have (i) a nomination and corporate governance
committee; or (ii) a remuneration committee that meets the requirements of Nasdaq Rule 5605(d) & (e), nor do we have any current intention to
establish either.
Principal Differences between Cayman Islands and U.S. Corporate Law
The Companies Act was modeled originally after similar laws in England and Wales but does not follow subsequent statutory enactments in England and
Wales. In addition, the Companies Act differs from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant
differences between the provisions of the Companies Act applicable to Arco and the laws applicable to companies incorporated in the United States and their
shareholders.
Mergers and Similar Arrangements
The Companies Act permits mergers or consolidations between two Cayman Islands companies and between Cayman Islands companies, or between a
Cayman Islands company and a company incorporated in another jurisdiction (provided that is facilitated by the laws of that other jurisdiction).
Where the merger or consolidation is between two Cayman Islands companies, the directors of each constituent company must approve a written plan of
merger or consolidation, which must then be authorized by (a) a special resolution of the shareholders of each company; and (b) such other authorization, if
any, as may be specified in such constituent company’s Articles of Association. No shareholder resolution is required for a merger between a parent company
(i.e., a company that owns at least 90% of the issued shares of each class in a subsidiary company) and its subsidiary company. The consent of each holder of
a fixed or floating security interest of a constituent company must be obtained, unless the court waives such requirement. If the Cayman Islands Registrar of
Companies is satisfied that the requirements of the Companies Act (which includes certain other formalities) have been complied with, the Registrar of
Companies will register the plan of merger or consolidation. Where the merger or consolidation involves a foreign company, the procedure is similar, save that
with respect to the foreign company, the director of the Cayman Islands company is required to make a declaration to the effect that, having made due
enquiry, he is of the opinion that the requirements set out below have been met: (i) that the merger or consolidation is permitted or not prohibited by the
constitutional documents of the foreign company and by the laws of the jurisdiction in which the foreign company is incorporated, and that those laws and
any requirements of those constitutional documents have been or will be complied with; (ii) that no petition or other similar proceeding has been filed and
remains outstanding or order made or resolution adopted to wind up or liquidate the company in any foreign jurisdiction, (iii) that no receiver, trustee,
administrator or other similar person has been appointed in any jurisdiction and is acting in respect of the foreign company, its affairs or property or any part
thereof, (iv) that no scheme, order, compromise or similar arrangement has been entered into or made in any jurisdiction whereby the rights of creditors of the
foreign company are and continue to be suspended or restricted.
Moreover, Cayman Islands law also has separate statutory provisions that facilitate the reconstruction or amalgamation of companies, in certain
circumstances, schemes of arrangement will generally be more suited for complex mergers or other transactions involving widely held companies, commonly
referred to in the Cayman Islands as a "scheme of arrangement” which may be tantamount to a merger. In the event that a merger was sought pursuant to a
scheme of arrangement (the procedure of which are more
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rigorous and take longer to complete than the procedures typically required to consummate a merger in the United States), the arrangement in question is
approved by a majority in number of each class of shareholders and creditors with whom the arrangement is to be made, and who must in addition represent
three-fourths in value of each such class of shareholders or creditors, as the case may be, that are present and voting either in person or by proxy at a
meeting, or meetings summoned for that purpose. The convening of the meetings and subsequently the terms of the arrangement must be sanctioned by the
Grand Court of the Cayman Islands. While a dissenting shareholder would have the right to express to the court the view that the transaction should not be
approved, the court can be expected to approve the arrangement if it satisfies itself that:
● Arco is not proposing to act illegally or beyond the scope of its corporate authority and the statutory provisions as to majority vote have been
complied with;
● the shareholders have been fairly represented at the meeting in question;
● the arrangement is such as a businessman would reasonably approve; and
● the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Act or that would amount to a
"fraud on the minority.”
If a scheme of arrangement or takeover offer (as described below) is approved, any dissenting shareholder would have no rights comparable to appraisal
rights, which would otherwise ordinarily be available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for
the judicially determined value of the shares.
Squeeze-out Provisions
When a takeover offer is made and accepted by holders of 90.0% of the shares to whom the offer is made within four months, the offeror may, within a
two-month period, require the holders of the remaining shares to transfer such shares on the terms of the offer. An objection may be made to the Grand Court
of the Cayman Islands but is unlikely to succeed unless there is evidence of fraud, bad faith, collusion or inequitable treatment of the shareholders.
Further, transactions similar to a merger, reconstruction and/or an amalgamation may in some circumstances be achieved through other means to these
statutory provisions, such as a share capital exchange, asset acquisition or control, through contractual arrangements, of an operating business.
Shareholders’ Suits
Maples and Calder (Cayman) LLP, our Cayman Islands counsel is not aware of any reported class action having been brought in a Cayman Islands court.
Derivative actions have been brought in the Cayman Islands courts, and the Cayman Islands courts have confirmed the availability for such actions. In most
cases, we will be the proper plaintiff in any claim based on a breach of duty owed to us, and a claim against (for example) our officers or directors usually may
not be brought by a shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority and be applied by a court in
the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:
● a company is acting or proposing to act illegally or beyond the scope of its authority;
● the act complained of, although not beyond the scope of the authority, could be effected if duly authorized by more than the number of votes which
have actually been obtained; and
● those who control the company are perpetrating a "fraud on the minority.”
A shareholder may have a direct right of action against us where the individual rights of that shareholder have been infringed or are about to be infringed.
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Corporate Governance
Cayman Islands law restricts transactions between a company and its directors unless there are provisions in the Articles of Association which provide a
mechanism to alleviate possible conflicts of interest. Additionally, Cayman Islands law imposes on directors’ duties of care and skill and fiduciary duties to
the companies which they serve. Under Arco’s Articles of Association, a director must disclose the nature and extent of his interest in any contract or
arrangement and following such disclosure and subject to any separate requirement under applicable law or the listing rules of the Nasdaq, and unless
disqualified by the chairman of the relevant meeting, the interested director may vote in respect of any transaction or arrangement in which he or she is
interested. The interested director shall be counted in the quorum at such meeting and the resolution may be passed by a majority of the directors present at
the meeting.
Subject to the foregoing and our Articles of Association, our directors may exercise all the powers of Arco to vote compensation to themselves or any
member of their body in the absence of an independent quorum. Our Articles of Association provide that, in the event a Compensation Committee is
established, it shall be made up of such number of independent directors as is required from time to time by the Nasdaq rules (or as otherwise may be required
by law).
As a foreign private issuer, we are permitted to follow home country practice in lieu of certain Nasdaq corporate governance rules, subject to certain
requirements. We currently rely, and will continue to rely, on the foreign private issuer exemption with respect to the following rules:
● Nasdaq Rule 5605(b), which requires that independent directors comprise a majority of a company’s board of directors. As allowed by the laws of the
Cayman Islands, independent directors do not comprise a majority of our board of directors.
● Nasdaq Rule 5605(e)(1), which requires that a company have a nominations committee comprised solely of "independent directors” as defined by
Nasdaq. As allowed by the laws of the Cayman Islands, we do not have a nominations committee nor do we have any current intention to establish
one.
● Nasdaq Rule 5605(d) & (e), which require that compensation for our executive officers and selection of our director nominees be determined by a
majority of independent directors. As allowed by the laws of the Cayman Islands, we do not have (i) a nomination and corporate governance
committee; or (ii) a remuneration committee that meets the requirements of Nasdaq Rule 5605(d) & (e), nor do we have any current intention to
establish either.
Borrowing Powers
Arco’s directors may exercise all the powers of Arco to borrow money and to mortgage or charge its undertaking, property and assets (present and
future) and uncalled capital or any part thereof and to issue debentures, debenture stock, mortgages, bonds and other such securities whether outright or as
security for any debt, liability or obligation of Arco or of any third-party. Such powers may be varied by a special resolution of shareholders (requiring a two-
thirds majority vote).
Indemnification of Directors and Executive Officers and Limitation of Liability
The Companies Act does not limit the extent to which a company’s Articles of Association may provide for indemnification of directors and officers,
except to the extent that it may be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or
the consequences of committing a crime. Arco’s Articles of Association provide that we shall indemnify and hold harmless our directors and officers against
all actions, proceedings, costs, charges, expenses, losses, damages, liabilities, judgments, fines, settlements and other amounts incurred or sustained by such
directors or officers, other than by reason of such person’s dishonesty, willful default or fraud, in or about the conduct of our company’s business or affairs
(including as a result of any mistake of judgment) or in the execution or discharge of his duties, powers, authorities or discretions, including without prejudice
to the generality of the foregoing, any costs, expenses, losses or liabilities incurred by such director or officer in defending (whether successfully or
otherwise) any civil, criminal or other proceedings concerning Arco or our affairs in any court whether in the Cayman Islands or elsewhere. This standard of
conduct is generally the same as permitted under the Delaware General Corporation Law for a Delaware corporation.
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Insofar as indemnification for liabilities arising under the Securities Act may be permitted to Arco’s directors, officers or persons controlling the Company
under the foregoing provisions, we have been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
Directors’ Fiduciary Duties
As a matter of Cayman Islands law, a director of a Cayman Islands company is in the position of a fiduciary with respect to the company. Accordingly,
directors and officers owe the following fiduciary duties (1) duty to act in good faith in what the director or officer believes to be in the best interests of the
company as a whole; (2) duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose; (3) directors should
not improperly fetter the exercise of future discretion; (4) duty to exercise powers fairly as between different sections of shareholders; (5) duty to exercise
independent judgment; and (6) duty not to put themselves in a position in which there is a conflict between their duty to the company and their personal
interests. However, this obligation may be varied by the company’s Articles of Association, which may permit a director to vote on a matter in which he has a
personal interest provided that he has disclosed that nature of his interest to the board of directors. With respect to the duty of directors to avoid conflicts of
interest, Arco’s Articles of Association vary from the applicable provisions of Cayman Islands law mentioned above by providing that a director must
disclose the nature and extent of his or her interest in any contract or arrangement, and following such disclosure and subject to any separate requirement
under applicable law or the listing rules of the Nasdaq, and unless disqualified by the chairman of the relevant meeting, such director may vote in respect of
any transaction or arrangement in which he or she is interested and may be counted in the quorum at the meeting. In addition to the above, under Cayman
Islands law, directors also owe a duty of care which is not fiduciary in nature. This duty has been defined as a requirement to act as a reasonably diligent
person having both the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as are carried
out by that director in relation to the company and the general knowledge skill and experience which that director has. As set out above, directors have a duty
not to put themselves in a position of conflict and this includes a duty not to engage in self-dealing, or to otherwise benefit as a result of their position.
However, in some instances what would otherwise be a breach of this duty can be forgiven and/or authorized in advance by the shareholders provided that
there is full disclosure by the directors. This can be done by way of permission granted in the memorandum and articles of association or alternatively by
shareholder approval at general meetings.
A director of a Cayman Islands company also owes to the company duties to exercise independent judgment in carrying out his functions and to exercise
reasonable skill, care and diligence, which has both objective and subjective elements. Recent Cayman Islands case law confirmed that directors must exercise
the care, skill and diligence that would be exercised by a reasonably diligent person having the general knowledge, skill and experience reasonably to be
expected of a person acting as a director. Additionally, a director must exercise the knowledge, skill and experience which he or she actually possesses.
A general notice may be given to the board of directors to the effect that (1) the director is a member or officer of a specified company or firm and is to be
regarded as interested in any contract or arrangement which may after the date of the notice be made with that company or firm; or (2) he or she is to be
regarded as interested in any contract or arrangement which may after the date of the notice to the board of directors be made with a specified person who is
connected with him or her, will be deemed sufficient declaration of interest. This notice shall specify the nature of the interest in question. Following the
disclosure being made pursuant to Arco’s Articles of Association and subject to any separate requirement under applicable law or the listing rules of the
Nasdaq, and unless disqualified by the chairman of the relevant meeting, a director may vote in respect of any transaction or arrangement in which he or she is
interested and may be counted in the quorum at the meeting.
In comparison, under Delaware corporate law, a director of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty
has two components: the duty of care and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily
prudent person would exercise under similar circumstances. Under this duty, a director must inform himself or herself of, and disclose to shareholders, all
material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in a manner he or she reasonably
believes to be in the best interests of the corporation. He or she must not use his or her corporate position for personal gain or advantage. This duty prohibits
self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a
director, officer or controlling shareholder and not shared by the shareholders generally. In general, actions of a director are presumed to have been made on
an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the corporation. However, this presumption may be
rebutted by evidence of a breach of one of the fiduciary duties. Should such evidence
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be presented concerning a transaction by a director, a director must prove the procedural fairness of the transaction, and that the transaction was of fair value
to the corporation.
Shareholder Proposals
Under the Delaware General Corporation Law, a shareholder has the right to put any proposal before the annual meeting of shareholders, provided it
complies with the notice provisions in the governing documents. The Delaware General Corporation Law does not provide shareholders an express right to
put any proposal before the annual meeting of shareholders, but Delaware corporations generally afford shareholders an opportunity to make proposals and
nominations provided that they comply with the notice provisions in the certificate of incorporation or bylaws. A special meeting may be called by the board
of directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
The Companies Act provides shareholders with only limited rights to requisition a general meeting and does not provide shareholders with any right to
put any proposal before a general meeting. However, these rights may be provided in a company’s Articles of Association. Arco’s Articles of Association
provide that upon the requisition of one or more shareholders representing not less than one-third of the voting rights entitled to vote at general meetings, the
board will convene an extraordinary general meeting and put the resolutions so requisitioned to a vote at such meeting. The Articles of Association provide
no other right to put any proposals before annual general meetings or extraordinary general meetings.
Cumulative Voting
Under the Delaware General Corporation Law, cumulative voting for elections of directors is not permitted unless the corporation’s certificate of
incorporation specifically provides for it. Cumulative voting potentially facilitates the representation of minority shareholders on a board of directors since it
permits the minority shareholder to cast all the votes to which the shareholder is entitled on a single director, which increases the shareholder’s voting power
with respect to electing such director. As permitted under Cayman Islands law, Arco’s Articles of Association do not provide for cumulative voting. As a
result, the shareholders of Arco are not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors
The office of a director shall be vacated automatically if, among other things, he or she (1) becomes prohibited by law from being a director, (2) becomes
bankrupt or makes an arrangement or composition with his creditors, (3) dies or is in the opinion of all his co-directors, incapable by reason of mental disorder
of discharging his duties as director (4) resigns his office by notice to us or (5) has for more than six months been absent without permission of the directors
from meetings of the board of directors held during that period, and the remaining directors resolve that his/her office be vacated.
Transaction with Interested Shareholders
The Delaware General Corporation Law provides that; unless the corporation has specifically elected not to be governed by this statute, it is prohibited
from engaging in certain business combinations with an "interested shareholder” for three years following the date that this person becomes an interested
shareholder. An interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting shares
or who or which is an affiliate or associate of the corporation and owned 15% or more of the corporation’s outstanding voting shares within the past three
years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the target in which all shareholders would not be treated
equally. The statute does not apply if, among other things, prior to the date on which the shareholder becomes an interested shareholder, the board of
directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder. This encourages any
potential acquirer of a Delaware corporation to negotiate the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result, Arco cannot avail itself of the types of protections afforded by the Delaware business
combination statute. However, although Cayman Islands law does not regulate transactions between a company and its significant shareholders, it does
provide that the board of directors owe duties to ensure that these transactions are entered into
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bona fide in the best interests of the company and for a proper corporate purpose and, as noted above, a transaction may be subject to challenge if it has the
effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up
Under the Delaware General Corporation Law, unless the board of directors approves the proposal to dissolve, dissolution must be approved by
shareholders holding 100% of the total voting power of the corporation. If the dissolution is initiated by the board of directors, it may be approved by a simple
majority of the corporation’s outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority
voting requirement in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the
courts of the Cayman Islands or by a special resolution of its members or, if the company resolves by ordinary resolution that it be wound up because it is
unable to pay its debts as they fall due. The court has authority to order winding up in a number of specified circumstances including where it is, in the
opinion of the court, just and equitable to do so.
Under the Companies Act, Arco may be dissolved, liquidated or wound up by a special resolution of shareholders (requiring a two-thirds majority vote).
Arco’s Articles of Association also give its board of directors authority to petition the Cayman Islands Court to wind up Arco.
Variation of Rights of Shares
Under the Delaware General Corporation Law, a corporation may vary the rights of a class of shares with the approval of a majority of the outstanding
shares of that class, unless the certificate of incorporation provides otherwise. Under Arco’s Articles of Association, if the share capital is divided into more
than one class of shares, the rights attached to any class may only be varied with the written consent of the holders of two-thirds of the shares of that class or
the sanction of a special resolution passed at a separate meeting of the holders of the shares of that class.
Also, except with respect to share capital (as described above), alterations to Arco’s Articles of Association may only be made by special resolution of
shareholders (requiring a two-thirds majority vote).
Amendment of Governing Documents
Under the Delaware General Corporation Law, a corporation’s certificate of incorporation may be amended only if adopted and declared advisable by the
board of directors and approved by a majority of the outstanding shares entitled to vote, and the bylaws may be amended with the approval of a majority of
the outstanding shares entitled to vote and may, if so provided in the certificate of incorporation, also be amended by the board of directors. Under Cayman
Islands law, Arco’s Articles of Association generally (and save for certain amendments to share capital described in this section) may only be amended by
special resolution of shareholders (requiring a two-thirds majority vote).
Rights of Non-Resident or Foreign Shareholders
There are no limitations imposed by Arco’s Articles of Association on the rights of non-resident or foreign shareholders to hold or exercise voting rights
on Arco’s shares. In addition, there are no provisions in the Articles of Association governing the ownership threshold above which shareholder ownership
must be disclosed.
Handling of Mail
Mail addressed to us and received at our registered office will be forwarded unopened to the forwarding address, which will be supplied by us. None of
us, our directors, officers, advisors or service providers (including the organization which provides registered office services in the Cayman Islands) will bear
any responsibility for any delay howsoever caused in mail reaching the forwarding address.
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ITEM 16H. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 16I. DISCLOSURE REGARDING FOREIGN JURISDICTIONS THAT PREVENT INSPECTIONS
Not applicable.
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Item 17. Financial Statements
We have responded to Item 18 in lieu of this item.
ITEM 18. FINANCIAL STATEMENTS
PART III
Financial Statements are filed as part of this annual report, see pages F-1 to F-78 to this annual report.
ITEM 19. EXHIBITS
The following documents are filed as part of this annual report:
Exhibit No.
2.1
Description of Securities registered under Section 12 of the Exchange Act (incorporated herein by reference to Exhibit 2.1 to our
annual report on Form F-1 (File No. 333-227007) filed with the SEC on March 31, 2020).
Exhibit
3.1
10.1
12.1
12.2
13.1
13.2
21.1
23.1
Memorandum and Articles of Association of Arco (incorporated herein by reference to Exhibit 3.1 to the Amendment No. 2 to our
registration statement on Form F-1 (File No. 333-227007) filed with the SEC on September 17, 2018).
Form of indemnification agreement (incorporated herein by reference to Exhibit 10.1 to our registration statement on Form F-1 (File No.
333-227007) filed with the SEC on August 24, 2018).
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Executive Officer.*
Certification pursuant to section 302 of the Sarbanes-Oxley Act of 2002 of the Chief Financial Officer.*
Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, of the Chief
Executive Officer.*
Certification pursuant to 18 U.S.C. section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002, of the Chief
Financial Officer.*
List of subsidiaries.*
Consent of Ernst & Young Auditores Independentes S.S.*
101.SCH*
Inline XBRL Taxonomy Extension Schema Document
101.CAL*
Inline XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF*
Inline XBRL Taxonomy Extension Definition Linkbase Document
101.LAB*
Inline XBRL Taxonomy Extension Label Linkbase Document
101.PRE*
Inline XBRL Taxonomy Extension Presentation Linkbase Document
104
Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)
*
Filed herewith.
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The registrant hereby certifies that it meets all of the requirements for filing on Form 20-F and that it has duly caused and authorized the undersigned to
SIGNATURES
sign this annual report on its behalf.
Date: March 31, 2022
Date: March 31, 2022
Arco Platform Limited
By: /s/ Ari de Sá Cavalcante Neto
Name:
Title:
Ari de Sá Cavalcante Neto
CEO
Arco Platform Limited
By: /s/ Roberto Rabello Otero
Name:
Title:
Roberto Rabello Otero
CFO
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INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Audited Annual Consolidated Financial Statements
Management's Report on Internal Control over Financial Reporting
Report of Independent Registered Public Accounting Firm (PCAOB ID 1448)
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting
Consolidated Statements of Financial Position as of December 31, 2021 and 2020
Consolidated Statements of Income (Loss) and Comprehensive Income (Loss) for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Changes in Equity for the Years Ended December 31, 2021, 2020 and 2019
Consolidated Statements of Cash Flows for the Years ended December 31, 2021, 2020 and 2019
Notes to the Consolidated Financial Statements for the Years Ended December 31, 2021, 2020 and 2019
Page
F-2
F-3
F-7
F-10
F-11
F-12
F-14
F-15
F-1
Table of Contents
Management’s Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for assessing the effectiveness of
internal control over financial reporting.
Our internal control over financial reporting is a process designed by, or under the supervision of, our chief executive officer and chief financial officer and
effected by our board of directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the
preparation of our consolidated financial statements for external purposes in accordance with International Financial Reporting Standards (IFRS) as issued by
the International Accounting Standards Board (IASB).
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatement. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Our management has assessed the effectiveness of our internal control over financial reporting as of December 31, 2021, based upon the criteria described in
Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a
material misstatement of our annual or interim consolidated financial statements will not be prevented or detected on a timely basis.
Based on this assessment and criteria, our chief executive officer and chief financial officer concluded that our disclosure controls and procedures were
effective as of December 31, 2021 to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under
the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the applicable rules and forms, and that it is
accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions
regarding required disclosure.
Our management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Me
Salva! Cursos e Consultorias S.A. ("Me Salva!”), Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A. ("Eduqo”), Desenvoolva – Educação,
Treinamento e Consultoria Corporativa Ltda. ("Edupass”) and P2D Educação Ltda. ("P2D”), which are included in the 2021 consolidated financial statements
of the Company. Collectively, Me Salva!, Eduqo, Edupass and P2D constituted less than 3% of the Company’s total assets as of December 31, 2021 and less
than 5% of the Company’s total revenues for the year ended December 31, 2021.
March 31, 2022
/s/ Ari de Sá Cavalcante Neto
Ari de Sá Cavalcante Neto
Chief Executive Officer
/s/ Roberto Rabello Otero
Roberto Rabello Otero
Chief Financial Officer
F-2
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Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Arco Platform Limited
Opinion on the Financial Statements
We have audited the accompanying consolidated statements of financial position of Arco Platform Limited (the "Company”) as of December 31, 2021 and
2020, the related consolidated statements of income and comprehensive income, changes in equity and cash flows for each of the three years in the period
ended December 31, 2021, and the related notes (collectively referred to as the ‘‘consolidated financial statements’’). In our opinion, the consolidated financial
statements present fairly, in all material respects, the financial position of the Company at December 31, 2021 and 2020, and the results of its operations and its
cash flows for each of the three years in the period ended December 31, 2021, in conformity with International Financial Reporting Standards as issued by the
International Accounting Standards Board - IASB.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's
internal control over financial reporting as of December 31, 2021, based on criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 31, 2022 expressed an unqualified opinion
thereon.
Basis for Opinion
These financial statements are the responsibility of the Company’s Management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company
in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks.
Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by Management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required
to be communicated to the audit committee and that: (1) related to accounts or disclosures that are material to the financial statements and (2) involved our
especially challenging, subjective, or complex judgements. The communication of critical audit matters does not alter in any way our opinion on the financial
statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on
the accounts or disclosures to which they relate.
F-3
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Description of the Matter
Business combinations - fair value of net assets acquired
The Company made certain acquisitions during the year ended December 31, 2021, as disclosed in Note 4. The
Company recorded these acquisitions as business combinations using the acquisition method, allocating the purchase
price to the assets acquired and liabilities assumed, including identifying intangible assets and contingent
considerations, at their respective fair values. The significant assumptions used to estimate the fair value of the net
assets acquired included discount rates and certain assumptions that form the basis of the forecasted results (e.g.,
revenue growth rates and operating profit margin). These significant assumptions are forward looking and could be
affected by future economic and market conditions.
This matter was considered a critical audit matter in our audit due to the significant estimation required by
management to determine the fair value of the net assets acquired.
How We Addressed the
Matter in our audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the
accounting process for business combinations including controls over management’s review of the significant
assumptions described above.
To test the estimated fair value of the net assets acquired, we performed audit procedures that included, among others,
evaluating the Company's selection of the valuation methodology, evaluating the methods and significant
assumptions used by the Company's valuation specialist, and evaluating the completeness and accuracy of the
underlying data supporting the significant assumptions and estimates. We involved our valuation specialists to assist
with our evaluation of the methodology used by the Company and significant assumptions included in the fair value
estimates. For example, we compared the significant assumptions to current industry, market and economic trends, to
the assumptions used to value similar assets in other past acquisitions, to the historical results of the acquired
business and to other guidelines used by companies within the same industry. We also evaluated the financial
statements disclosures included in Note 4.
F-4
Table of Contents
Description of the Matter
At December 31, 2021, the Company’s goodwill was R$ 1,950 million. As discussed in Note 14 to the consolidated
financial statements, goodwill is tested for impairment at least annually at the cash generating unit (CGU) level.
Goodwill impairment test
Auditing management’s annual goodwill impairment test is complex and highly judgmental due to the significant
estimation required to determine the fair value of the cash generating units. In particular, the fair value estimate is
sensitive to significant assumptions, such as changes in the weighted average cost of capital, revenue growth rate,
operating margin and working capital, which are affected by expectations about future economic scenarios, particularly
those in emerging markets.
How We Addressed the
Matter in our audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the
Company’s accounting process for the goodwill impairment test including controls over management’s review of the
significant assumptions described above.
To test goodwill impairment our audit procedures included, among other, involving our valuation specialist to assist in
evaluating the methodologies and key assumptions, including the estimated future gross margins, growth rate and the
discount rate used in the valuation model. We also performed sensitivity analyses to understand the impact of
reasonable changes in the key assumptions and compared those significant assumptions to the Company’s industry
and economic trends. Our procedures also consisted of testing the mathematical accuracy of the forecasts in the
impairment assessment model and confirm whether Management’s estimate of each CGU’s recoverable amount
considering the value in use calculation was based on a discounted cash flow model. We agreed the forecast cash
flows to board-approved budgets and market communications and assessed the accuracy of prior period forecasts.
We also evaluated the Company’s disclosures in respect to its goodwill impairment assessment in Note 14.
F-5
Table of Contents
Description of the Matter
At December 31, 2021, accounts payable to selling shareholders amounted to R$ 1,669 million, as disclosed in Note 17.
Those amounts arise from certain business combinations and investments in associates. The determination of the
recorded amounts include the use of management assumptions about future business performance and interest rates.
Accounts payable to selling shareholders
Auditing accounts payable to selling shareholders was complex and required significant auditor judgement because of
the high degree of subjectivity and judgment applied by management in the process of estimating the significant
assumptions underlying the prospective financial information used in the determination of the recorded amounts.
Those significant assumptions are forward looking and could be affected by future economic and market conditions.
How We Addressed the
Matter in our audit
We obtained an understanding, evaluated the design and tested the operating effectiveness of management controls
over the Company’s determination of accounts payable to selling shareholders, including controls over management’s
review of the significant assumptions used in the prospective financial information described above.
To test the account payable to selling shareholders, our audit procedures included, among others, involving our
valuation specialists to assist in evaluating the methodologies and key assumptions, including the estimated future
revenue, growth rate and the discount rate used to prepare the projected financial information. We also performed
sensitivity analyses to evaluate the change in the liability amounts resulting from changes in those assumptions. We
also compared those significant assumptions to market benchmarks and evaluated them against known general
economic trends. We also evaluated the Company’s disclosures in Note 17.
/s/ ERNST & YOUNG
Auditores Independentes S.S.
We have served as the Company’s auditor since 2017.
Fortaleza, Brazil
March 31, 2022
F-6
Table of Contents
Report of Independent Registered Public Accounting Firm
To the Shareholders and the Board of Directors of
Arco Platform Limited
Opinion on Internal Control over Financial Reporting
We have audited Arco Platform Limited and subsidiaries’ internal control over financial reporting as of December 31, 2021, based on criteria established in
Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO
criteria). In our opinion, Arco Platform Limited (the Company and subsidiaries) maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2021, based on the COSO criteria.
As indicated in the accompanying Report of Management on Arco Platform Limited's Internal Control Over Financial Reporting, management's assessment of
and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Me Salva! Cursos e Consultorias S.A.
("Me Salva!”), Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A. ("Eduqo”), Desenvoolva – Educação, Treinamento e Consultoria
Corporativa Ltda. ("Edupass”) and P2D Educação Ltda. ("P2D”), which are included in the 2021 consolidated financial statements of the Company.
Collectively, Me Salva!, Eduqo, Edupass and P2D constituted less than 3% of the Company’s total assets as of December 31, 2021 and less than 5% of the
Company’s total revenues for the year ended December 31, 2021. Our audit of internal control over financial reporting of the Company also did not include an
evaluation of the internal control over financial reporting of Me Salva!, Eduqo, Edupass and P2D.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s
consolidated statements of financial position as of December 31, 2021 and 2020, and the related consolidated statements of operations, comprehensive income
(loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2021, and the related notes and our report dated March
31, 2022 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial Reporting. Our
responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm
registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the
applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being
made only in
F-7
Table of Contents
accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
/s/ ERNST & YOUNG
Auditores Independentes S.S.
Fortaleza, Brazil
March 31, 2022
F-8
Table of Contents
Arco Platform Limited
Consolidated financial statements
December 31, 2021
F-9
Table of Contents
Arco Platform Limited
Consolidated statements of financial position
As of December 31, 2021 and 2020
(In thousands of Brazilian reais, unless otherwise stated)
Assets
Current assets
Cash and cash equivalents
Financial investments
Trade receivables
Inventories
Recoverable taxes
Derivative financial assets
Related parties
Other assets
Total current assets
Non-current assets
Deferred income tax
Recoverable taxes
Financial investments
Derivative financial assets
Related parties
Other assets
Investments and interests in other entities
Property and equipment
Right-of-use assets
Intangible assets
Total non-current assets
Total assets
Liabilities
Current liabilities
Trade payables
Labor and social obligations
Taxes and contributions payable
Income taxes payable
Advances from customers
Lease liabilities
Loans and financing
Accounts payable to selling shareholders
Other liabilities
Total current liabilities
Non-current liabilities
Labor and social obligations
Lease liabilities
Loans and financing
Derivative financial liabilities
Provision for legal proceedings
Accounts payable to selling shareholders
Other liabilities
Total non-current liabilities
Total liabilities
Equity
Share capital
Capital reserve
Treasury shares
Share-based compensation reserve
Accumulated losses
Equity attributable to equity holders of the parent
Non-controlling interests
Total equity
Total liabilities and equity
The accompanying notes are part of the consolidated financial statements.
F-10
Notes
December 31,
2021
December 31,
2020
5
6
7
8
9
16
10
24
9
6
16
10
11
12
13
14
18
13
15
17
18
13
15
16
28
17
19
211,143
973,294
593,263
158,582
38,811
301
4,571
66,962
2,046,927
321,223
22,216
40,762
560
6,819
57,534
126,873
73,885
35,960
3,257,360
3,943,192
5,990,119
103,292
157,601
7,953
37,775
35,291
20,122
228,448
799,553
3,176
1,393,211
661
22,996
1,602,879
223,561
1,398
869,233
946
2,721,674
4,114,885
11
2,203,857
(180,775)
90,813
(238,672)
1,875,234
—
1,875,234
424,410
712,645
415,282
74,076
19,304
—
9,970
24,073
1,679,760
236,903
1,121
10,349
—
10,508
22,239
9,654
26,087
30,022
2,549,637
2,896,520
4,576,280
40,925
85,069
9,676
44,731
23,080
12,742
107,706
656,014
331
980,274
36,570
22,478
203,413
—
1,366
1,130,501
794
1,395,122
2,375,396
11
2,200,645
—
80,817
(80,589)
2,200,884
—
2,200,884
5,990,119
4,576,280
Table of Contents
Arco Platform Limited
Consolidated statements of income
For the years ended December 31, 2021, 2020 and 2019
(In thousands of Brazilian reais, except earnings per share)
Net revenue
Cost of sales
Gross profit
Selling expenses
General and administrative expenses
Other income (expenses), net
Operating profit
Finance income
Finance costs
Finance result
Share of (loss) profit of equity-accounted investees
(Loss) profit before income taxes
Income taxes - income (expense)
Current
Deferred
Net (loss) profit for the year
(Loss) Profit for the year attributable to
Equity holders of the parent
Non-controlling interests
Basic (loss) earnings per share - in Brazilian reais
Class A
Class B
Diluted (loss) earnings per share - in Brazilian reais
Class A
Class B
The accompanying notes are part of the consolidated financial statements.
F-11
Notes
21
22
22
22
23
23
23
11
24
20
20
December 31, December 31, December 31,
2020
2019
2021
1,232,074
(294,407)
1,001,710
(221,130)
572,837
(117,258)
937,667
780,580
455,579
(496,298)
(328,643)
16,673
(372,269)
(270,558)
(2,258)
(199,780)
(191,438)
(6,287)
129,399
135,495
58,074
91,212
(372,086)
(280,874)
45,211
(142,013)
(96,802)
72,047
(170,855)
(98,808)
(22,182)
409
(1,800)
(173,657)
39,102
(42,534)
(65,609)
81,183
15,574
(87,379)
65,057
(22,322)
(46,850)
79,953
33,103
(158,083)
16,780
(9,431)
(158,083)
—
16,780
—
(9,431)
—
(3.18)
(3.18)
(3.18)
(3.18)
0.30
0.30
0.30
0.30
(0.18)
(0.18)
(0.18)
(0.18)
Table of Contents
Arco Platform Limited
Consolidated statements of changes in equity
For the years ended December 31, 2021, 2020 and 2019
(In thousands of Brazilian reais, unless otherwise stated)
Balances at December 31, 2018
Change in accounting policy (IFRS 16)
Balances at January 1, 2019
Net loss for the year
Total comprehensive loss
Corporate reorganization
Tax benefit on tax deductible goodwill – reversion
Capital increase
Issuance of common shares in follow-on public offering
Share issuance costs
Non-controlling interest
Share-based compensation plan
Restricted stocks transferred
Balances at December 31, 2019
Net profit for the year
Total comprehensive income
Issuance of common shares in follow-on public offering
Share issuance costs
Restricted stock transferred
Shared-based compensation plan
Attributable to equity holders of the parent
Share
Capital
Share-based
compensation Accumulated
capital reserve
reserve
losses
Total
Non-controlling
interests
Total
equity
(86,687) 1,070,178
(1,251)
(1,251)
1,068,927
(87,938)
(294) 1,069,884
(1,251)
1,068,633
—
(294)
10 1,089,505
—
—
1,089,505
10
—
—
—
—
(36,624)
—
(46,314)
—
1
13,829
— 589,602
(18,223)
—
—
—
—
—
15,847
—
67,350
—
67,350
—
—
—
—
—
—
—
—
33,043
(15,847)
(9,431)
(9,431)
—
—
—
—
—
—
—
—
(9,431)
(9,431)
(36,624)
(46,314)
13,830
589,602
(18,223)
—
33,043
—
11
1,607,622
84,546
(97,369)
1,594,810
—
—
—
—
— 591,898
(16,291)
—
17,416
—
—
—
—
—
16,780
16,780
16,780
16,780
—
—
(17,416)
13,687
— 591,898
(16,291)
—
—
—
13,687
—
—
—
—
—
—
—
—
294
—
—
(9,431)
(9,431)
(36,624)
(46,314)
13,830
589,602
(18,223)
294
33,043
—
— 1,594,810
—
—
16,780
16,780
— 591,898
(16,291)
—
—
—
13,687
—
Balances at December 31, 2020
11
2,200,645
80,817
(80,589)
2,200,884
— 2,200,884
The accompanying notes are part of the consolidated financial statements.
F-12
Table of Contents
Arco Platform Limited
Consolidated statements of changes in equity
For the years ended December 31, 2021, 2020 and 2019
(In thousands of Brazilian reais, unless otherwise stated)
Balances at December 31, 2020
Net loss for the year
Total comprehensive loss
Share based compensation plan
Purchase of treasury shares
Investment shares transferred
Restricted stocks transferred
Balances at December 31, 2021
Share
capital
Capital
reserve
2,200,645
—
—
—
—
16
3,196
11
—
—
—
—
—
—
Treasury
shares
—
—
—
—
(200,751)
1,877
18,099
Share-based
compensation Accumulated
reserve
80,817
—
—
33,184
—
(1,893)
(21,295)
losses
(80,589)
(158,083)
(158,083)
—
—
—
—
Total
2,200,884
(158,083)
(158,083)
33,184
(200,751)
—
—
11
2,203,857
(180,775)
90,813
(238,672)
1,875,234
The accompanying notes are part of the consolidated financial statements.
F-13
Table of Contents
Arco Platform Limited
Consolidated statements of cash flows
For the years ended December 31, 2021, 2020 and 2019
(In thousands of Brazilian reais, unless otherwise stated)
Operating activities
Net (loss) profit before income taxes
Adjustments to reconcile net (loss) profit before income taxes to cash generated from operations
Depreciation and amortization
Inventory reserves
Allowance for doubtful accounts
Loss on sale/disposal of property and equipment and intangible
Fair value change in financial derivatives
Changes in accounts payable to selling shareholders
Share of loss (profit) of equity-accounted investees
Share-based compensation plan
Accrued interest on loans and financing
Interest accretion on acquisition liability
Income from financial investments
Interest on lease liabilities
Provision for legal proceedings
Provision for payroll taxes (restricted stock units)
Foreign exchange loss
Changes in fair value of step acquisitions
Gain on changes of interest of investment
Other financial cost/revenue, net
Changes in assets and liabilities
Trade receivables
Inventories
Recoverable taxes
Other assets
Trade payables
Labor and social obligations
Taxes and contributions payable
Advances from customers
Other liabilities
Cash generated from operations
Income taxes paid
Interest paid on lease liabilities
Interest paid on investment acquisition
Interest paid on loans and financing
Payments for contingent consideration
Net cash flows generated from (used in) operating activities
Investing activities
Acquisition of property and equipment
Payment of investments and interests in other entities
Acquisition of subsidiaries, net of cash acquired
Payments of accounts payable to selling shareholders
Acquisition of intangible assets
(Purchase) maturity of financial investments
Loans to related parties
Net cash flows used in investing activities
Financing activities
Capital increase
Capital increase proceeds from public offering
Share issuance costs
Purchase of treasury shares
Payment of lease liabilities
Payment to owners to acquire entity’s shares
Financial derivatives
Loans and financing
Loans and financing costs
Net cash flows from financing activities
Foreign exchange effects on cash and cash equivalents
(Decrease) increase in cash and cash equivalents
Cash and cash equivalents at the beginning of the year
Cash and cash equivalents at the end of the year
(Decrease) increase in cash and cash equivalents
The accompanying notes are part of the consolidated financial statements.
F-14
December 31,
2021
December 31,
2020
December 31,
2019
(173,657)
194,885
26,778
26,610
908
37,291
87,820
22,182
70,127
57,245
121,611
(25,930)
4,795
(149)
235
1,772
—
(14,022)
(1,276)
437,225
(184,472)
(62,212)
(39,199)
(62,802)
52,915
(6,640)
(2,590)
11,665
(5,724)
138,166
(72,564)
(3,294)
(13,700)
(20,275)
(3,837)
24,496
(60,078)
(125,273)
(795,905)
(101,286)
(151,318)
(265,132)
5,000
(1,493,992)
—
—
—
(200,751)
(15,729)
(193,954)
185,409
1,490,065
(21,582)
1,243,458
12,771
(213,267)
424,410
211,143
(213,267)
39,102
127,455
7,453
34,684
4,277
(562)
20,330
(409)
36,333
19,862
68,379
(13,388)
3,036
587
(2,997)
(188)
307
—
(2,315)
341,946
(108,087)
(18,161)
3,152
(14,087)
3,886
7,239
1,147
(2,981)
(1,420)
212,634
(95,053)
(2,100)
(187)
(13,423)
(9,520)
92,351
(10,822)
(32,628)
(204,286)
—
(96,827)
(130,113)
(5,000)
(479,676)
—
591,898
(16,291)
—
(8,510)
(1,733)
—
200,912
(3,629)
762,647
188
375,510
48,900
424,410
375,510
(42,534)
48,314
8,476
17,392
3,499
(473)
89,403
1,800
33,043
1,002
42,206
(45,797)
1,489
120
8,333
555
(3,708)
(3,286)
(2,362)
157,472
(136,407)
(14,637)
(8,494)
(16,035)
8,455
15,950
1,951
19,997
(268)
27,984
(34,747)
(852)
—
—
—
(7,615)
(10,991)
(41,853)
(798,885)
—
(43,102)
277,389
(14,000)
(631,442)
13,830
589,602
(18,897)
—
(4,407)
(928)
—
97,011
—
676,211
(555)
36,599
12,301
48,900
36,599
Table of Contents
Notes to the 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, 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 a
corporate reorganization and initial public offering in 2018. Arco Brazil is the holding company of the operating subsidiaries, including Companhia Brasileira de
Educação e Sistemas de Ensino S.A. ("CBE”), which provides educational content from basic to secondary education ("K-12 curriculum”). The Company’s
principal administrative office is located at 2840 Rua Augusta, 9th Floor, Consolação, São Paulo, Brazil.
Since 2015, the Company has been investing in technology and its printed methodology has evolved to an educational platform, capable of delivering the
entire K-12 curriculum content.
The Company offers a complete pedagogical methodology using technology features to deliver educational content to improve the learning process. The
Company’s activities 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 terms of validity ranging from one to five years, pursuant to which educational content
is provided in printed and digital format to private schools. The revenue is driven by the number of enrolled students at each customer using the solutions
and the agreed upon price per student per year, all in accordance with the terms and conditions set forth in each contract. As a result, the Company benefits
from high visibility in its net revenue and operating margin, which is calculated by dividing the operating profit by net revenue over a given period.
These consolidated financial statements were authorized for issue by the Board of Directors on March 31, 2022.
1.2 Significant events during the year
(a)
Internal restructurings
Change of corporate name of subsidiary
On April 19, 2021, 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 PSD Educação S.A. was changed to Companhia Brasileira de Educação e Sistemas de Ensino S.A.
Corporate restructuring
On January 1,2021 the Company started a corporate reorganization through the incorporation of Arco Ventures S.A. by Companhia Brasileira de Educação e
Sistemas de Ensino S.A.
On July 1, 2021, the Company continued the corporate reorganization through the incorporation of Barra Américas Editora Ltda., Distribuidora de Material
Didático Desterro Ltda., and SAS Sistema de Ensino Ltda.e SAS Livrarias Ltda. by Companhia Brasileira de Educação e Sistemas de Ensino S.A.
On October 1, 2021, the Company completed the corporate reorganization for the year, through the incorporation of Nave à Vela Ltda. by Companhia Brasileira
de Educação e Sistemas de Ensino S.A.
These restructurings seek an operational improvement and generation of income tax savings from the tax deductible amortization of acquired goodwill and
identified intangibles arising from the purchase of Positivo.
F-15
Table of Contents
All incorporated companies were under common control of Arco and the incorporated assets and liabilities of the respective companies were recorded at their
carrying amounts. There were no tax effects resulting from the incorporation.
Cancelation of treasury shares
As of November 1, 2021, the Company had repurchased an aggregated amount of 1,172,991 Class A Common Shares under the Repurchase Program
previously approved by the Board of Directors. On that date, the Company canceled 750,000 Treasury Shares with the approval of the Board of Directors.
(b)
Financial transactions
Issuance of debentures
In August 2021, the Company issued non-convertible debentures through its subsidiary Companhia Brasileira de Educação e Sistemas de Ensino S.A.,
consisting of 900,000 debentures with a unitary value of R$1.00, in the total amount of R$900,000 (with transaction costs in the amount of R$ 8,550). The
purpose of this issue is to pay the amount due on the COC and Dom Bosco acquisition. See Note 15 for further information.
Investment from Dragoneer and General Atlantic
On November 30, 2021, Arco signed agreements led by affiliates of Dragoneer Investment Group LLC ("Dragoneer”), which have committed to make a US$100
million strategic investment, and General Atlantic Partners (Bermuda) J, L.P. ("General Atlantic”), which has committed to make a US$50 million strategic
investment, through the purchase of convertible senior notes, subject to customary closing conditions. The full amount committed was received by the
Company on November 30, 2021. See Note 15 for further information.
Loan agreement
On November 11, 2021, the subsidiary Geekie entered into a loan agreement in the amount of US$ 11,020 thousand with an interest rate of 2.452% p.a.
Additionally, Geekie entered into swap contracts with the lender, swapping the original interest rate to CDI + 1.7208%, avoiding any exchange risk. See Note
15 for further information.
(c)
Acquisition of interests in other entities and business combinations
Acquisition of additional shares of Geekie
On January 20, 2021, Arco acquired an additional 1.36% interest in Geekie’s share capital through a capital increase of R$4,000, increasing its total interest to
57.42%.
Investment in INCO Limited ("INCO”)
On January 25, 2021, the Company acquired 8,571,427 series B ordinary shares of INCO, a company that provides financial and administrative services to
private schools, equivalent to 30.0% of the total capital stock for R$25,000.
On April 27, 2021, the Company invested R$ 33,195 in the entity and an additional R$ 53,523 on September 27, 2021, in new rounds of investments. See Note 11
for further information.
F-16
Table of Contents
Acquisition of COC and Dom Bosco learning systems
On March 6, 2021, the Company announced that it entered into a definitive agreement (the "Purchase Agreement”) with Pearson Education do Brasil Ltda.
("Pearson”) to acquire COC and Dom Bosco, two important K-12 learning systems in Brazil.
COC and Dom Bosco have over 50 years of academic track record in Brazil, serving over 800 partner schools and around 210 thousand students in all regions
of the country, from pre-K to high school and pre-university. The brands have a strong presence in the Southeast region of Brazil, especially in the state of
São Paulo.
Arco expects to accelerate the growth of COC and Dom Bosco by updating their content and technology, improving distribution and customer service
capabilities, as well as to cross-sell supplemental solutions within the COC and Dom Bosco partner school base.
This transaction was approved by the Brazilian Administrative Council for Economic Defense (CADE) in September 2021, and the transaction closing date
occurred on October 1, 2021. as described in Note 4.
Acquisition of Me Salva!
On March 12, 2021, the Company announced that it had acquired 60% of the outstanding shares of Me Salva!, an entity founded in 2011 with an online
educational solution to help students improve their ENEM scores and be admitted to the best universities in the country. The online solutions platform offers
recorded and live video classes, comprehensive exercises, essay writing tools, assessment tests, 1-on-1 tutoring and personalized study plans. The remaining
40% will be acquired from the non-controlling interests in 2025 based on the enterprise value (as defined in the sale purchase agreement) of Me Salva! as of
December 31, 2024.
This transaction expands Arco’s supplemental solutions portfolio to test prep and tutoring, with an estimated addressable market of R$5 billion and favorable
growth prospects. The deal rationale relies on accelerating Me Salva!’s growth by leveraging Arco’s resources and strengthening Arco’s B2B2C winning
factors with new digital capabilities. See Note 4 for further information.
Investment in Tera Treinamentos Profissionais Ltda. ("Tera”)
On April 9, 2021, Arco acquired a 23.43% interest in Tera for R$15,000 through the purchase of interest from minority shareholders and a capital increase.
Tera provides courses and training for professional and management development and additionally provides consulting services in project development, IT
and marketing. See Note 11 for further information.
Acquisition of Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A. ("Eduqo”)
On April 22, 2021, the Company entered into an agreement (the "Purchase Agreement”) to acquire 100% of the outstanding shares of Eduqo, which provides
educational services, acting specifically in the Learning Management System (LMS), for R$ 30,000, subject to price adjustments.
This transaction was approved by CADE in June 2021, and the transaction closing date occurred on July 1, 2021. See Notes 4 and 17 for further information.
Acquisition of Desenvoolva – Educação, Treinamento e Consultoria Corporativa Ltda. ("Edupass”)
On September 3, 2021, the Company entered into an agreement (the "Purchase Agreement”) to acquire 100% of the outstanding shares of Edupass, which
provides educational services, acting specifically as an "education as a benefit” platform. The Company connects educational institutions with companies
and professionals, and currently has more than 75,000 courses linked with corporate education benefits to help employees in their career development.
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The transaction was closed for R$ 5,000, with an additional earn out of R$ 11,254 to be paid in 2024. See Notes 4 and 17 for further information.
(d) Information related to Covid-19 pandemic
In January 2021, the COVID vaccine began to be applied in Brazil. Vaccination started with the priority groups: health workers, the elderly, the disabled and
indigenous villagers. Currently the vaccine is available to all the adult population in Brazil and children above the age of 5 years old, and the vaccination
campaign has maintained a rapid pace since its beginning.
After the holiday celebrations at the end of 2021, there was an increase in the number of COVID-19 cases in Brazil. During January 2022, state and municipal
governments took restrictive measures to contain a possible new wave of the virus. These measures have been relaxed as the number of cases decreased
compared to the beginning of the year.
Currently, the Country presents an optimistic scenario and is believed to be closer to the end of the pandemic, since on average 90% of the Brazilian
population over 18 years of age are vaccinated with at least the first dose, and about 70% of this target audience are fully vaccinated according to information
from Brazilian health authorities.
The initial restrictive measures taken by Brazilian states and local authorities directly impacted the education industry by indefinitely postponing on-site
school activities. Nonetheless, education was included in the essential activities list by some states in 2021, allowing private schools to conduct classes
applying a hybrid model, with on-site and remote classes. The resumption of Brazilian economic activity is occurring in stages, with restrictions over some
activities being gradually lifted, including restrictions for the education sector, in accordance with specific health and safety protocols. In person classes are
returning but is occurring differently in each Brazilian state, according to their particular circumstances.
Notwithstanding the above, the Company did not suspend its activities and, despite the gradual lifting of the restrictions by the authorities, most of its
workforce continues to work remotely from home, except for part of the Company’s administrative and distribution centers’ teams that are working on-site, in
accordance with health and safety protocols and social distancing guidelines. The Company has made additional investments in IT and network
infrastructure; incurred additional expenses for cleaning and disinfecting the installations; purchased alcohol and masks; funded COVID-19 tests and H1N1
flu vaccination campaigns with the objective of taking care of its employees, reducing the demand for care in health units and facilitating the diagnosis of
COVID-19. The Company also delivered chairs, computers, and work kits to its employees. Additionally, to support partner schools, since the beginning of
the pandemic, the Company has made available an integrated platform with daily live classes to all students, webinars, broadcast, and remote support to
maintain student learning, while complying with social distancing measures.
The measures discussed above, including travel restrictions, were put in place to safeguard the health and safety of the Company’s employees, customers,
and suppliers, but have not limited the Company’s ability to maintain its operations. In addition, these alternative working arrangements have not adversely
affected financial reporting systems, internal control over financial reporting or disclosure controls and procedures.
The Company’s content production continues according to the scheduled curriculum calendar and the current educational material has been delivered to the
schools according to their calendar for the year, enabling the Company to recognize revenues on these products.
With respect to the Company’s distribution and delivery capacity, which relies on third parties, the Company’s main suppliers did not raise any issues related
to their ability to fulfill scheduled shipments or indicated the need to incur in any significant additional expenses.
As a result, as of December 31, 2021, the following events and transactions occurred during the period:
● The Company incurred additional expenses of R$2,071 during the year ended December 31, 2021, related to health care in food and emotional health
programs offered to the Company’s employees.
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● 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 and concluded that there are no indications that demonstrate the need to recognize a
provision for impairment of long-lived assets in the consolidated financial statements.
● The Company obtained rent concessions, regarding leased buildings, that occurred as a direct consequence of the COVID-19 pandemic and were
accounted as if they were not lease modifications. Therefore, no changes occurred in the expected useful lives and residual values of properties and
equipment. For the year ended December 31, 2021, the discount obtained was R$273.
● The Company’s revenue for the school year ended September 30, 2021, was 9% below the ACV booking for the school year period starting in
October of the previous year to September of the current year.
Given the uncertainty around the extent and timing of the future spread of COVID-19, the imposition of additional protective measures, or the relaxation of
existing protective measures, it is not possible to accurately predict COVID-19’s general impact on the education industry in Brazil or to reasonably estimate
its impact on Arco’s results of operations, cash flows or financial condition, including, but not limited to:
● A decrease in the number of students, which may impact the expected amount of revenue.
● An increase in bad debts due to the current economic scenario.
● An adverse change in the fair value of financial instruments recognized on the Company’s books.
● The need for 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 operations, financial performance, financial
position, and cash flows.
2 Significant accounting policies
2.1 Basis for preparation of the consolidated financial statements
The Company’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the
International Accounting Standards Board (IASB).
The consolidated financial statements have been prepared on a historical cost basis, except for certain financial assets, derivative financial instruments and
contingent consideration from business combinations that have been measured at fair value.
Arco is a holding company and considers the currency of the local environment of the operational companies in Brazil as its functional currency, as this is the
environment which drives the dividend income it receives, which is its primary source of revenue.
Therefore, the functional currency of the Company is the Brazilian real and the consolidated financial statements are presented in Brazilian reais ("BRL” or
"R$”). All amounts are rounded to the nearest thousands, except when otherwise indicated.
The consolidated financial statements provide comparative information in respect of the previous period.
2.2 Basis of consolidation and investments in associates
The consolidated financial statements comprise the financial statements of the Company, its subsidiaries and investments in associates as of December 31,
2021 and 2020 and for the years ended December 31, 2021, 2020 and 2019.
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The table below is a list of the Company’s subsidiaries and investments:
Name
Arco Educação S.A.
Arce Participações Ltda.
Companhia Brasileira de Educação e Sistemas de Ensino S.A.
Barra Américas Editora Ltda (a).
Distribuidora de Material Didático Desterro Ltda. (a)
SAS Sistema de Ensino Ltda. (a)
Arco Ventures S.A. (a)
SAS Livrarias Ltda. (a)
SAE Digital S.A.
International School Serviços de Ensino, Treinamento e Editoração, Franqueadora S.A.
Nave à Vela Ltda. (a)
EEM Licenciamento de Programas Educacionais Ltda.
NLP Soluções Educacionais Ltda.
WPensar S.A.
Geekie Desenvolvimento de Softwares S.A.
Studos Software Ltda.
Escola da Inteligência Cursos Educacionais Ltda.
Me Salva! Cursos e Consultorias S/A.
Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A.
Desenvoolva – Educação, Treinamento e Consultoria Corporativa Ltda.
P2D Educação Ltda.
Bewater Ventures I GA Fundo de Investimento em Participações Multiestratégia
INCO Limited
Tera Treinamentos Profissionais Ltda
Principal
activities
Holding
Holding
Educational content
Educational content
Educational content
Educational content
Educational content
Educational content
Educational content
Educational content
Educational content
Educational technology
Educational content
Educational technology
Educational technology
Educational content
Educational content
Educational content
Educational content
Educational content
Educational content
Private equity
Collection services
Educational content
Country
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Cayman Islands
Brazil
Investment
type
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Subsidiary
Investee
Investee
Investee
Direct and indirect interest
2021
100.0 %
100.0 %
100.0 %
—
—
—
—
—
100.0 %
51.5 %
—
100.0 %
100.0 %
100.0 %
57.4 %
100.0 %
60.0 %
60.0 %
100.0 %
100.0 %
100.0 %
11.0 %
26.1 %
23.4 %
2020
2019
100.0 %
—
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
51.5 %
51.0 %
100.0 %
100.0 %
100.0 %
56.0 %
100.0 %
60.0 %
—
—
—
—
14.5 %
—
—
100.0 %
—
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
100.0 %
51.5 %
51.0 %
100.0 %
100.0 %
25.0 %
37.5 %
—
—
—
—
—
—
—
—
—
(a) During the year the entity was incorporated by Companhia Brasileira de Educação e Sistemas de Ensino S.A. as described in Note 1.2 (a).
Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary.
Control is achieved when the Company is exposed to, or has rights, to variable returns from its involvement with the investee and has the ability to affect
those returns through its power over the investee. Assets, liabilities, income and expenses of a subsidiary acquired or disposed during the year are included
in the consolidated financial statements from the date the Company gains control until the date the Company ceases control of the subsidiary.
Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Company’s accounting
policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions, and any unrealized income and expenses
arising from intra-group transactions, are eliminated in full on consolidation.
A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Company loses control over a
subsidiary, it derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, and any resulting gain
or loss is recognized in profit or loss.
Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statements of income (loss) and comprehensive
income (loss), changes in equity and financial position, respectively.
2.3 Summary of significant accounting policies
This note provides a description of the significant accounting policies adopted in the preparation of these consolidated financial statements in addition to
other policies that have been disclosed in other notes to these consolidated financial statements. These policies have been consistently applied to all periods
presented, unless otherwise stated.
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a) Business combinations and goodwill
Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration
transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination,
the Company elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable
net assets. Acquisition-related costs are expensed as incurred and included in general and administrative expenses.
The Company determines that it has acquired a business when the acquired set of activities and assets include an input and a substantive process that
together significantly contribute to the ability to create outputs.
The acquired process is considered substantive if it is critical to the ability to continue producing outputs, and the inputs acquired include an organized
workforce with the necessary skills, knowledge, or experience to perform that process or it significantly contributes to the ability to continue producing
outputs and is considered unique or scarce or cannot be replaced without significant cost, effort, or delay in the ability to continue producing outputs.
When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance
with the contractual terms, economic circumstances, and pertinent conditions as of the acquisition date.
Any contingent consideration to be transferred by the acquirer is recognized at fair value at the acquisition date. Contingent consideration classified as an
asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments, is measured at fair value with the changes in fair value
recognized in the statement of income (loss) in accordance with IFRS 9. Other contingent consideration that is not within the scope of IFRS 9 is measured at
fair value at each reporting date with changes in fair value recognized in profit or loss.
Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling
interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in
excess of the aggregate consideration transferred, the Company re-assesses whether it has correctly identified all of the assets acquired and all of the
liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an
excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss.
After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For impairment testing, goodwill acquired in a business
combination is, from the acquisition date, allocated to each segment that is expected to benefit from the combination.
Where goodwill has been allocated to a segment and part of the operation within that segment is disposed of, the goodwill associated with the disposed
operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is
measured based on the relative values of the disposed operation and the portion of the segment unit retained.
The current Brazilian tax law allows the deductibility of the acquisition date goodwill and fair value of net assets acquired when a corporate reorganization
occurs after acquisition by the Company (i.e. when the Company merges or spins off the businesses acquired). Until such action occurs, the tax and
accounting bases of the net assets acquired are the same as of the acquisition date and no deferred tax effects are recognized.
Certain acquired subsidiaries utilize the presumed profit regime as described in Note 24.a) to calculate income taxes. Under this regime, there is no difference
between the carrying amount and related tax basis of assets and liabilities and therefore no deferred income taxes were recorded in these financial statements
at acquisition date or any subsequent periods.
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b) Investment in associates and joint venture
An associate is an entity over which the Company has significant influence. Significant influence is the power to participate in the financial and operating
policy decisions of the investee but is not control or joint control over those policies.
A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture.
Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the
unanimous consent of the parties sharing control.
The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. The
Company’s investments in its associate and joint venture are accounted for using the equity method.
Under the equity method, the investment in an associate or a joint venture is initially recognized at cost. The carrying amount of the investment is adjusted to
recognize changes in the Company’s share of net assets of the associate or joint venture since the acquisition date. Goodwill relating to the associate or joint
ventures is included in the carrying amount of the investment and is not tested for impairment separately.
The statement of income (loss) reflects the Company’s share of the results of operations of the associate or joint venture. In addition, when there has been a
change recognized directly in the equity of the associate or joint venture, the Company recognizes its share of any changes, when applicable, in the statement
of changes in equity.
Unrealized gains and losses resulting from transactions between the Company and the associate or joint venture are eliminated to the extent of the interest in
the associate or joint venture.
The aggregate of the Company’s share of profit or loss of an associate and a joint venture is shown on the face of the statement of income (loss) outside
operating profit and represents profit or loss after tax of the associate or joint venture.
The financial statements of the associate or joint venture are prepared for the same reporting period as the Company. When necessary, adjustments are made
to bring the accounting policies in line with those of the Company.
After application of the equity method, the Company determines whether it is necessary to recognize an impairment loss on its investment in its associate or
joint venture. At each reporting date, the Company determines whether there is objective evidence that the investment in the associate or joint venture is
impaired. If there is such evidence, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate or
joint venture and its carrying value, and then recognizes the loss within share of profit (loss) of equity-accounted investees in the statement of income (loss).
c) Current versus non-current classification
The Company presents assets and liabilities in the statement of financial position based on current/non-current classification. An asset is current when it is:
● Expected to be realized or intended to be sold or consumed in the normal operating cycle;
● Held primarily for the purpose of trading;
● Expected to be realized within twelve-months after the reporting period; or
● Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve-months after the reporting period.
All other assets are classified as non-current.
A liability is current when:
● It is expected to be settled in the normal operating cycle;
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● It is held primarily for the purpose of trading;
● It is due to be settled within twelve-months after the reporting period; or
● There is no unconditional right to defer the settlement of the liability for at least twelve-months after the reporting period.
The terms of the liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.
The Company classifies all other liabilities as non-current.
Deferred tax assets and liabilities are classified as non-current assets and liabilities.
d) Fair value measurement
The Company measures certain financial instruments such as, financial assets, financial investments, derivatives and financial liabilities at fair value at each
balance sheet date.
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either.
● in the principal market for the asset or liability; or
● in the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the Company.
The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that
market participants act in their economic best interest.
The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing
the use of relevant observable inputs and minimizing the use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as
follows, based on the lowest level input that is significant to the fair value measurement as a whole:
● Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities.
● Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
● Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.
For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, the Company determines whether transfers have
occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a
whole) at the end of each reporting period.
At each reporting date, the Company analyzes the movements in the values of assets and liabilities which are required to be remeasured or re-assessed as per
the Company’s accounting policies. For this analysis, the Company verifies the major inputs applied in the latest valuation by agreeing the information in the
valuation computation to contracts and other relevant documents.
The Company also compares the change in the fair value of each asset and liability with relevant external sources to determine whether the change is
reasonable.
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For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities based on the nature, characteristics and risks of the
asset or liability and the level of the fair value hierarchy, as explained above. See Note 26 for further information.
e) Financial instruments – initial recognition and measurement
A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.
f) Financial assets
Initial recognition and measurement
Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other comprehensive income (OCI), and
fair value through profit or loss.
The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Company’s business
model for managing them. Except for trade receivables that do not contain a significant financing component or for which the Company has applied the
practical expedient, the Company initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss,
transaction costs. Trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient are
measured at the transaction price under IFRS 15.
For a financial asset to be classified and measured at amortized cost or fair value through other comprehensive income (OCI), it should give rise to cash flows
that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is
performed at an instrument level. Financial assets with cash flows that are not SPPI are classified and measured at fair value through profit or loss, irrespective
of the business model.
The Company’s business model for managing financial assets refers to how it manages its financial assets to generate cash flows. The business model
determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets classified and measured
at amortized cost are held within a business model with the objective to hold financial assets in order to collect contractual cash flows while financial assets
classified and measured at fair value through OCI are held within a business model with the objective of both holding to collect contractual cash flows and
selling.
Subsequent measurement
For purposes of subsequent measurement, financial assets are classified as: amortized cost or fair value through profit or loss. There are no financial assets
designated as fair value through OCI.
Financial assets at amortized cost
Financial assets at amortized cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are
recognized in profit or loss when the asset is derecognized, modified or impaired.
The Company’s financial assets at amortized cost include trade receivables and certain financial investments.
Financial assets at fair value through profit or loss
Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognized in the
statement of profit or loss. This category includes derivative instruments.
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A derivative embedded in a hybrid contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate
derivative if: the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded derivative
would meet the definition of a derivative; and the hybrid contract is not measured at fair value through profit or loss. Embedded derivatives are measured at
fair value with changes in fair value recognized in profit or loss. Reassessment only occurs if there is either a change in the terms of the contract that
significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss
category.
Derecognition
A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the
Company’s consolidated statement of financial position) when:
● The rights to receive cash flows from the asset have expired; or
● The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full
without material delay to a third party under a ‘pass-through’ arrangement-and either (a) the Company has transferred substantially all the risks and
rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset but has transferred
control of the asset.
When the Company has transferred its rights to receive cash flows from an asset or has entered a pass-through arrangement, it evaluates if, and to what
extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all the risks and rewards of the asset, nor
transferred control of the asset, the Company continues to recognize the transferred asset to the extent of its continuing involvement. In that case, the
Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and
obligations that the Company has retained.
Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and
the maximum amount of consideration that the Company could be required to repay.
Impairment
Further disclosures relating to impairment of financial assets are also provided in the following notes:
● Disclosures for significant assumptions - Note 3
● Trade receivables, including contract assets - Note 7
The Company recognizes an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based
on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive,
discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other
credit enhancements that are integral to the contractual terms.
For trade receivables, the Company applies a simplified approach in calculating ECLs. Therefore, the Company does not track changes in credit risk, but
instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Company has established a provision matrix that is based on its
historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
The Company considers a financial asset in default when contractual payments are 360 days past due. Management considers this period of maturity to be
adequate considering the Company’s business model and the historical customer’s payment since the contracts are signed annually and during this period
the Company can negotiate the payment of the security reducing the credit risk. However, in certain cases, the Company may also consider a financial asset to
be in default when internal or external information indicates that the Company is unlikely to receive the outstanding contractual amounts in full before
considering any credit enhancements held by the Company. A financial asset is written off when there is no reasonable expectation of recovering the
contractual cash flows.
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g) Financial liabilities
Initial recognition and measurement
Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as
derivatives, as appropriate.
All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
The Company’s financial liabilities include trade payables, loans and borrowings, financial instruments from acquisition of interests and accounts payable to
selling shareholders.
Subsequent measurement
For purposes of subsequent measurement, financial liabilities are classified in two categories:
● Financial liabilities at fair value through profit or loss
● Financial liabilities at amortized cost (loans and borrowings)
Financial liabilities at fair value through profit or loss
Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as
at fair value through profit or loss.
Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative
financial instruments entered by the Company that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Separated
embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments.
Gains or losses on liabilities held for trading are recognized in the statement of income (loss).
Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria
in IFRS 9 are satisfied.
Financial liabilities at amortized cost (loans and borrowings)
After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the effective interest rate (EIR) method.
Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process.
Amortized cost is calculated by considering any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization
is included as finance costs in the statement of income (loss).
Derecognition
A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced
by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or
modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is
recognized in the statement of income (loss).
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h) Offsetting of financial instruments
Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently
enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities
simultaneously.
i) Derivative financial instruments
Initial recognition and subsequent measurement
The Company has derivative financial instruments such as put options from investments and forward currency swaps to protect its exposure to foreign
currency risks. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are
subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is
negative.
Any gains or losses arising from changes in the fair value of derivatives are recorded directly to finance result.
j) Cash and cash equivalents
Cash and cash equivalents in the statement of financial position comprise cash in banks and on hand and short-term highly liquid financial investments with
an original maturity of three months or less, that are readily convertible to a known amount of cash and subject to an insignificant risk of changes in value.
For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term financial investments, as they are
considered an integral part of the Company’s cash management.
k) Inventories
Inventories are measured at the lower of cost or net realizable value. The costs of inventories are based on the average cost method and include costs
incurred on the purchase of inventories, editorial production costs and other costs incurred in bringing them to their current location and condition. Costs of
purchased inventory are determined after deducting any discounts and recoverable taxes.
Educational content in progress is considered as inventories in progress and comprises the costs incurred to produce educational content. This amount is
measured based on the allocation of hours incurred by editorial production employees in the preparation of educational content.
The inventory reserve for educational material is calculated based on their expected net realizable value. Inventory reserve corresponds to a reserve for
inventory obsolescence and is recorded in cost of sales. It is estimated based on the amount of educational materials from prior collections which are no
longer used for sale and educational materials which the Company expects will not be sold based on the actual sales. In determining the inventory reserve, the
Company considers management’s current assessment of the marketplace, industry trends and projected product demand as compared to the number of units
currently in stock.
l) Property and equipment
Property and equipment are stated at cost, net of accumulated depreciation and accumulated impairment losses, if any.
Subsequent expenditure is capitalized only if it is probable that the future economic benefits associated with the expenditure will flow to the Company.
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Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows:
Machinery and equipment
Vehicles
Furniture and fixtures
IT equipment
Facilities
Leasehold improvements
10%
20%
10%
20%
10%
20% to 33%
An item of property and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are
expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and
the carrying amount of the asset) is included in the statement of income (loss) when the asset is derecognized.
The residual values, useful lives and methods of depreciation of property and equipment are reviewed at each financial year end and adjusted prospectively, if
appropriate.
m) Leases
The Company assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an
identified asset for a period of time in exchange for consideration.
Company as a lessee
The Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Company
recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.
Right-of-use assets
The Company recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use
assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of
right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement
date less any lease incentives received. Unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the
recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term, as follows:
Buildings
Equipment
1 to 4 years
1 to 4 years
If ownership of the leased asset transfers to the Company at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is
calculated using the estimated useful life of the asset. Right-of use assets are subject to impairment.
Lease liabilities
At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease payments to be made over the lease
term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that
depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a
purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company
exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognized as expense in the period on which the
event or condition that triggers the payment occurs.
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In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate
implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and
reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a
change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.
Short-term leases and leases of low-value assets
The Company applies the short-term lease recognition exemption to its short-term leases of properties (i.e., those leases that have a lease term of 12 months or
less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office
equipment that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line
basis over the lease term.
n) Intangible assets
Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair
value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated
impairment losses.
The Company capitalizes the costs directly related with the development of the educational platforms used to deliver content. These costs are substantially
comprised of technology related services and payroll expenses, recorded as internally developed software in the educational platform accounting ledger.
Development expenditure is capitalized only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future
economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. Otherwise, it
is recognized in the statement of income (loss) as incurred. After initial recognition, development expenditure is measured at cost less accumulated
amortization and any accumulated impairment losses.
Costs associated with maintaining internally developed software are recognized as an expense as incurred.
The useful lives of intangible assets are assessed as finite.
Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible
asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of
each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are
considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on
intangible assets with finite lives is recognized in the statement of income (loss) in the expense category that is consistent with the function of the intangible
assets.
An intangible asset is derecognized upon disposal (i.e., at the date the recipient obtains control) or when no future economic benefits are expected from its
use or disposal. Any gain or loss arising upon derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying
amount of the asset) is included in the statement of income (loss).
o) Impairment of non-financial asset
Further disclosures relating to impairment of non-financial assets are also provided in the following notes:
● Disclosures for significant assumptions – Note 3
● Property and equipment – Note 12
● Intangible assets – Note 14
● Goodwill and intangible assets with indefinite lives – Note 14
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The Company assesses annually whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for
an asset is required, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value
less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that
are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the
asset is considered impaired and is written down to its recoverable amount.
In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market
assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are
considered. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples,
quoted share prices for publicly traded companies or other available fair value indicators.
The Company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Company’s CGUs
to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is
calculated and applied to project future cash flows after the fifth year.
Impairment losses of continuing operations are recognized in the statement of income (loss) in expense categories consistent with the function of the impaired
asset.
For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment
losses no longer exist or have decreased. If such indication exists, the Company estimates the asset’s or CGU’s recoverable amount. A previously recognized
impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment
loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount
that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the
statement of income (loss).
Goodwill is tested for impairment annually and when circumstances indicate that the carrying value may be impaired. An operating segment is the lowest level
within the Company at which the goodwill is monitored for internal management purposes and therefore impairment tests of goodwill have been carried out at
each operating segment level. Impairment is determined for goodwill by assessing the recoverable amount of each operating segment to which the goodwill
relates. When the recoverable amount is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be
reversed in future periods.
p) Provisions
Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of past event, it is probable that an outflow of
resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The
expense relating to a provision is presented in the statement of income (loss) net of any reimbursement, when applicable.
q) Cash dividend
The Company recognizes a liability to pay a dividend when the distribution is authorized, and the distribution is no longer at the discretion of the Company.
The distribution is authorized when it is required to pay a dividend of the profit for the year in accordance with the Company’s Articles of Association or is
approved by the shareholders. A corresponding amount is recognized directly in equity.
r) Labor and social obligations
Labor and social obligations are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Company has a
present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.
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s) Share-based payments
Certain key executives of the Company receive remuneration in the form of share-based compensation, whereby the executives render services as
consideration for equity instruments (equity-settled transactions).
Equity-settled transactions
The expenses of equity-settled transactions are determined by the fair value at the date when the grant is made using an appropriate valuation model. That
expense is recognized in general and administrative expenses, together with a corresponding increase in equity (share-based compensation reserve), over the
period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). The cumulative expense recognized for equity-
settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the best estimate of the
number of equity instruments that will ultimately vest. The expense or credit in the statement of income (loss) for a period represents the movement in
cumulative expense recognized as at the beginning and end of that period.
Service and non-market performance conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the
conditions being met is assessed as part of the Company’s best estimate of the number of equity instruments that will ultimately vest. Market performance
conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are
considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award
unless there are also service and/or performance conditions.
No expense is recognized for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards
include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is satisfied,
provided that all other performance and/or service conditions are satisfied.
When the terms of an equity-settled award are modified, the minimum expense recognized is the grant date fair value of the unmodified award, provided the
original vesting terms of the award are met. An additional expense, measured as at the date of modification, is recognized for any modification that increases
the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee. Where an award is cancelled by the entity or by the
counterparty, any remaining element of the fair value of the award is expensed immediately through profit or loss.
The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share.
Cash-settled transactions
A liability is recognized for the fair value of cash-settled transactions. The fair value is measured initially and at each reporting date up to and including the
settlement date, with changes in fair value recognized in employee benefits expense. The fair value is expensed over the period until the vesting date with
recognition of a corresponding liability. The fair value is determined using a Black & Scholes model. The approach used to account for vesting conditions
when measuring equity-settled transactions also applies to cash-settled transactions.
t) Revenue from contracts with customers
Revenue from sale of education content
The Company sells educational content to private schools, which is delivered through printed and digital formats. Revenue from contracts with customers is
recognized when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Company expects
to be entitled, i.e., at the moment it delivers the content to private schools in printed and digital format when the Company fulfills its performance obligation,
and the revenue from these contracts is recognized at a point of time.
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Revenue is driven by the number of students enrolled in each school and is based on a value negotiated with each contract through the conditions contained
in the terms of sales. The technology is provided solely in support of the best use of its content. Both printed and digital content are the same.
Printed content
The Company provides printed content capable of delivering the entire K-12 curriculum. The Company also provides digital content, including its features,
and in this case, for the purpose of supporting the printed content, and it includes video lessons, online homework and assessments that are not customized
and have no stand-alone value if used separately or outside of the main context. In this context, the digital content and related features are an evolution from a
totally printed methodology to a broader approach and will continue to evolve and change in the coming years but are currently still deeply entwined with the
printed content.
Digital content
The Company has been investing in technology and has solutions provided only in digital content due to the evolution to an educational platform capable of
delivering entire K-12 curriculum content in a digital format and it includes video lessons, online homework and assessments for the purpose of supporting
the digital content.
The Company generates substantially all its revenue from contracts that have an average term from one to five years, pursuant to which the Company
provides educational content in printed and digital format to private schools. The Company’s revenue is driven by the number of enrolled students at each
customer using the solutions and the agreed price per student per year, all in accordance with the terms and conditions set forth in each contract. Each
contract contemplates penalties ranging between 20% to 100% of the remaining total value of the contract in the event of termination. However, the content
already delivered to the private schools is not returned to the Company unless the return conditions in the following paragraph are met.
Revenue recognition of digital content only consists in providing the digital content to the class/year to the school that will provide that to the students. The
Company recognizes the revenue at a point of time, when the content is available to the students.
Pursuant to the terms of the contracts with the schools, they are required, by the end of November of each year, to provide the Company with an estimate of
the number of enrolled students that will access the content in the next school year (which typically starts in February of the following year), allowing the
Company to start the delivery of its educational content. Since the contracts with the schools allows product returns or increase in the number of enrolled
students up to a certain limit, the Company recognizes revenue for the amount that is expected to be received based on past experience, assuming that the
other conditions for revenue recognition are met. A right of return asset (and corresponding adjustment to cost of sales) is also recognized for the right to
recover the goods from the customer.
The asset is measured at the former carrying amount of the inventory, less any expected costs to recover the goods and any potential decreases in value. The
Company updates the measurement of the asset for any revisions to the expected level of returns and any additional decreases in the value of the returned
products.
The Company may enter contracts with another party in addition to our customer. In making the determination as to whether revenue should be recognized on
a gross or net basis, the contract with the customer is analyzed to understand which party controls the relevant good or service prior to transferring to the
customer. This judgement is informed by facts and circumstances of the contract in determining whether the Company has promised to provide the specified
good or service or whether the Company is arranging for the transfer of the specified good or service, including which party is responsible for fulfilment, has
discretion to set the price to the customer and is responsible for inventory risk. On certain contracts, where the Company acts as an agent, only commissions
and fees receivable for services rendered are recognized as revenue. Any third-party costs incurred on behalf of the principal that are rechargeable under the
contractual arrangement are not included in revenue.
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Revenue from services
The Company provides services related to school management for private schools and students, and technological solutions for communicating with
students’ parents and a learning platform for students and teachers, which are delivered through monthly software licenses. Revenue from contracts with
customers is recognized when the control of services is transferred to the customer for an amount that reflects the consideration to which the Company
expects to be entitled for the exchange of services, that is, when it releases the license to use services. software for private schools.
The Company generates subscription revenue from the sale of user licenses, in which customers can use the services of online school management software.
The services are sold directly to schools that bundle the subscription with their own services provided to end customers. The Company fulfills its
performance obligation, and the revenue from these services is recognized on a straight-line basis during the subscription period.
Subscription revenue is driven by the number of students enrolled in each customer and is based on a value negotiated with each subscriber through the
conditions contained in the terms of use.
Interest income
For all financial instruments measured at amortized cost, interest income is recorded using the effective interest rate (EIR) method. The EIR is the rate that
exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying
amount of the financial asset. Interest income includes also gain from financial investments classified as financial assets at fair value through profit or loss.
Interest income is included in finance income in the statement of income (loss).
Cost to obtain a contract
The Company incurs costs to obtain each sales contract and recognizes as an asset the incremental costs of obtaining a contract with a customer if the entity
expects to recover those costs. The incremental costs of obtaining a contract are those costs that an entity incurs to obtain a contract with a customer that it
would not have incurred if the contract had not been obtained.
u) Taxes
Current income tax
Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax
laws used to compute the amount are those that are enacted or substantively enacted at the reporting date.
Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation
and establishes provisions where appropriate.
Deferred tax
Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for
financial reporting purposes at the reporting date.
Deferred tax liabilities are recognized for all taxable temporary differences, except:
● When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination
and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss;
● In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint venture, when the timing of
the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.
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Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax
assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry
forward of unused tax credits and unused tax losses can be utilized, except:
● When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction
that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss;
● In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint venture, deferred tax
assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will
be available against which the temporary differences can be utilized.
The current Brazilian legislation allows the amortization of goodwill in at least 5 years, for tax purposes, in cases of merger, spin-off or incorporation. Thus, it is
possible to have a tax benefit from goodwill in the incorporation, since it has been generated in the acquisition of interests from third parties.
The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable
profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and
are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.
Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based
on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.
The Company offsets deferred tax assets and deferred tax liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax
liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or
different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities
simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.
v) Treasury shares
Own equity instruments that are reacquired (treasury shares) are recognized at cost and deducted from equity. No gain or loss is recognized in profit or loss
on the purchase, sale, issue or cancellation of the Company’s own equity instruments.
2.4 Changes in accounting policies and disclosures
New and amended standards and interpretations
The Company applied for the first-time certain standards and amendments, which became effective for annual periods beginning on or after 1 January 2021
(unless otherwise stated). The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.
Interest Rate Benchmark Reform – Phase 2: Amendments to IFRS 9, IAS 39, IFRS 7, IFRS 4 and IFRS 16
The amendments provide temporary reliefs which address the financial reporting effects when an interbank offered rate (IBOR) is replaced with an alternative
nearly risk-free interest rate (RFR). The amendments include the following practical expedients:
● A practical expedient to require contractual changes, or changes to cash flows that are directly required by the reform, to be treated as changes to a
floating interest rate, equivalent to a movement in a market rate of interest;
● Permit changes required by IBOR reform to be made to hedge designations and hedge documentation without the hedging relationship being
discontinued;
● Provide temporary relief to entities from having to meet the separately identifiable requirement when an RFR instrument is designated as a hedge of a
risk component;
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These amendments had no impact on the consolidated financial statements of the Company. The Company intends to use the practical expedients in future
periods if they become applicable.
Covid-19-Related Rent Concessions beyond 30 June 2021 Amendments to IFRS 16
On 28 May 2020, the IASB issued Covid-19-Related Rent Concessions - amendment to IFRS 16 Leases The amendments provide relief to lessees from
applying IFRS 16 guidance on lease modification accounting for rent concessions arising as a direct consequence of the Covid-19 pandemic. As a practical
expedient, a lessee may elect not to assess whether a Covid-19 related rent concession from a lessor is a lease modification. A lessee that makes this election
accounts for any change in lease payments resulting from the Covid-19 related rent concession the same way it would account for the change under IFRS 16,
if the change were not a lease modification. The amendment was intended to apply until 30 June 2021, but as the impact of the Covid-19 pandemic is
continuing, on 31 March 2021, the IASB extended the period of application of the practical expedient to 30 June 2022.The amendment applies to annual
reporting periods beginning on or after 1 April 2021.
This amendment had an impact of R$ 273 on the consolidated financial statements of the Company due to the discounts obtained.
Standards issued but not yet effective
The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Company’s financial statements
are disclosed below. The Company intends to adopt these new and amended standards and interpretations, if applicable, when they become effective. The
Company is assessing the impact that changes in the standards will have in current practice, but does not expect a significant or any impact to occur on the
Company’s financial statements:
● Amendments to IAS 1: Classification of Liabilities as Current or Non-current
● Reference to the Conceptual Framework – Amendments to IFRS 3
● Onerous Contracts – Costs of Fulfilling a Contract – Amendments to IAS 37
● Property, Plant and Equipment: Proceeds before Intended Use – Amendments to IAS 16
● Disclosure of Accounting Policies (Amendments to IAS 1 and IFRS Practice Statement 2)
● Definition of Accounting Estimates (Amendments to IAS 8)
● Covid-19-Related Rent Concessions beyond 30 June 2021 (Amendment to IFRS 16)
● Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12)
● IFRS 17 Insurance Contracts
3 Significant accounting judgements, estimates and assumptions
The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the
reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures. Uncertainty about these assumptions and estimates could
result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Accounting estimates and
judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be
reasonable under the circumstances. Revisions to estimates are recognized prospectively.
Other disclosures relating to the Company’s exposure to risks and uncertainties includes:
● Capital management – Note 27
● Financial instruments risk management – Notes 26 and 27
● Sensitivity analyses disclosures – Note 27
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Estimates and assumptions
The key assumptions about the future and other key sources of estimation uncertainty as of the reporting date that include a significant risk of a material
adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Company based its assumptions and
estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future
developments, however, may change due to market changes or circumstances that arise and that are beyond the Company’s control. Such changes are
reflected in the assumptions where they occur.
Impairment of non-financial assets
Impairment exists when the carrying value of an asset or cash generating unit ("CGU”) or group of CGU exceeds its recoverable amount, defined as the higher
of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on data available from binding sales
transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs of disposing of the asset. The value in use
calculation is based on a discounted cash flow model ("DCF” model). The cash flows are derived from the budget for the next five years and do not include
restructuring activities to which the Company has not yet committed or significant future investments that will enhance the performance of the assets of the
CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as well as to expected future cash-inflows and the growth
rate used for extrapolation purposes. The Company determined that its operating segment is the cash generating unit. These estimates are most relevant to
goodwill that are recognized by the Company. The key assumptions used to determine the recoverable amount for the different operating segments, including
a sensitivity analysis, are disclosed and further explained in Note 14.
Inventory reserve
The Company recognizes a provision for disposal of inventory considering materials from previous collections not sold and a prospective model to estimate
the forecast of obsolescence of products from current collections. The applied model considers the historical data of non-realization of products to obtain the
expected loss percentages. Any significant changes between the observed losses compared to the historical loss pattern impact the expected loss
percentages estimated by the Company. See Note 8 for further information.
Provision for expected credit losses of trade receivables and contract assets
The Company uses a provision matrix to calculate ECLs for trade receivables and contract assets. The provision rates are based on days past due for
customer. The provision matrix is initially based on the Company’s historical observed default rates. The Company calibrates the matrix to adjust the historical
credit loss experience with forward-looking information.
The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of
ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Company’s historical credit loss experience and forecast of economic
conditions may also not be representative of customer’s actual default in the future. The information about the ECLs on the Company’s trade receivables and
contract assets is disclosed in Note 7.
Share-based payment
Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and
conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share
option or appreciation right, volatility and dividend yield and making assumptions about them. For the measurement of the fair value of equity-settled
transactions, the Company uses the Black & Scholes model. The assumptions and models used for estimating fair value for share-based payment transactions
are disclosed in Note 18. b).
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Taxes
Deferred tax assets are recognized for deductible temporary differences and unused tax credits from net operating losses carryforward to the extent that it is
probable that taxable profit will be available against which the losses can be utilized. Significant management judgement is required to determine the amount of
deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits, together with future tax planning strategies.
The Company has R$12,902 (2020: R$4,380) of unrecognized unused tax loss carryforwards as of December 31, 2021 related to subsidiaries that has a history of
losses. Such unused tax loss carryforwards do not expire and may not be used to offset taxable income of other subsidiaries of the Company. See Note 24 for
further information.
Fair value measurement of financial instruments
When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in
active markets, their fair value is measured using valuation techniques including the DCF model. The inputs into these models are taken from observable
markets where possible, but where this is not feasible, a degree of judgement is required to estimate fair values. Judgements include considerations of inputs
such as liquidity risk, credit risk and volatility. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments.
See Note 26 for further disclosures.
Contingent consideration, resulting from business combinations, is valued at fair value as of the acquisition date as part of the business combination. When
the contingent consideration meets the definition of a financial liability, it is subsequently remeasured at each reporting date. This determination of fair value
is based on discounted cash flows. The key assumptions taken into consideration are the probability of meeting each performance target and the discount
factor (see Notes 6 and 26 for additional information).
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Table of Contents
4 Business combinations and acquisition of non-controlling interests
The fair value of the identifiable assets and liabilities as of the date of each acquisition was:
Assets
Cash and cash and equivalents
Trade receivables
Inventories
Recoverable taxes
Deferred taxes
Advance to employees
Other assets
Property and equipment
Right-of-use assets
Intangible assets
Liabilities
Trade payables
Labor and social obligations
Taxes and contributions payable
Leases
Loans and financing
Advances from customers
Other liabilities
Net identifiable assets acquired at fair value
Goodwill arising on acquisition
Purchase consideration
Cash paid
Capital contribution
Accounts payables to selling shareholders arising from acquisition (Note 17)
Retained payments
Price adjustment
Analysis of cash flows on acquisition:
Transaction costs of the acquisition (included in cash flows from operating activities)
Cash paid and subscribed capital net of cash acquired with the subsidiary (included in cash flows from investing
activities)
F-38
Fair value as of the acquisition date
2021
Edupass
Eduqo
Me Salva!
10,562
2,010
80
7
—
—
160
145
112
12,022
25,098
614
296
211
112
91
322
2,263
3,909
21,189
28,326
49,515
15,779
10,000
22,196
1,324
217
1,112
300
—
50
—
—
4
74
270
9,097
10,907
77
232
657
270
119
—
4
1,359
9,548
22,422
31,970
15,097
—
16,076
—
797
362
23
—
—
—
—
102
—
—
3,702
4,189
56
42
519
—
—
22
—
639
3,550
11,679
15,229
2,000
—
13,229
—
—
P2D
24,136
17,786
23,348
1,175
3,137
109
2,622
319
—
168,187
240,819
8,738
5,205
65
—
—
202
6,113
20,323
220,496
560,075
780,571
788,985
—
—
—
(8,414)
(486)
(390)
(191)
(13,629)
(15,433)
(13,985)
(1,638)
(764,849)
Table of Contents
Assets
Cash and cash and equivalents
Trade receivables
Inventories
Recoverable taxes
Deferred taxes
Advance to employees
Other assets
Property and equipment
Right-of-use assets
Intangible assets
Liabilities
Trade payables
Labor and social obligations
Taxes and contributions payable
Income taxes payable
Leases
Loans and financing
Loans with related parties
Provision for legal proceedings
Advances from customers
Other liabilities
Total identifiable net assets at fair value
Goodwill arising on acquisition
Purchase consideration transferred
Cash paid
Forward contract of non-controlling interest at acquisition
Retained payments
Price adjustment
Fair value of previously held interest in a step acquisition
Analysis of cash flows on acquisition:
Transaction costs of the acquisition (included in cash flows from operating activities)
Cash paid and subscribed capital net of cash acquired with the subsidiary (included in cash flows
from investing activities)
WPensar
Studos
2020
Geekie
378
75
—
108
—
—
1
172
—
6,192
6,926
47
385
152
8
—
—
1,285
—
100
35
2,012
4,914
18,994
23,908
14,345
—
3,586
—
5,977
191
126
—
—
—
—
—
39
—
5,996
6,352
18
79
56
—
—
—
—
—
27
10
190
6,162
13,371
19,533
8,298
—
11,235
—
—
7,796
1,120
8,333
524
15,098
—
710
2,592
292
36,328
72,793
823
21,584
677
—
292
8,836
10,885
—
269
—
43,366
29,427
158,552
187,979
4,500
115,222
—
—
68,257
EI
14,492
11,129
4,419
—
—
11,484
697
843
2,418
238,825
284,307
1,709
3,097
—
—
2,418
—
—
599
—
166
7,989
275,684
219,715
496,033
200,000
291,413
—
4,620
—
(115)
(275)
(762)
(6,510)
(13,967)
(8,107)
3,296
(185,508)
The purchase price allocation is subject to change during the period of completion of the determination of the fair value of intangible assets according to the
deadline defined by IFRS.
(a)
Me Salva! Cursos e Consultorias S/A ("Me Salva!”)
On March 10, 2021, the Company acquired control of Me Salva!, by acquiring 60.0% of the outstanding shares on the acquisition date.
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Table of Contents
The purchase consideration transferred was R$ 49,515, comprised of:
For acquisition of 60%: (i) R$ 15,779 related to cash consideration paid on the acquisition date; (ii) R$ 10,000 capital contribution paid on the acquisition date;
(iii) R$ 1,324 retained for the period of 5 years for any eventual inaccuracies in the fulfillment of the guarantees given in the purchase and sale agreement,
which will be released in five annual installments; and (iv) R$ 217 determined as an "acquisition price adjustment.
For acquisition of remaining 40%: (i) R$ 22,196, representing the present value of the amount that will be paid in March 2025. Because the price is not fixed, the
Company considers the payment as contingent consideration and the financial liability is measured at FVPL and no non-controlling interest has been
recognized. The Company did not recognize deferred taxes related to the business combination because the tax basis and the accounting basis, including fair
value adjustments, were the same at the date of the business combination.
Goodwill
The goodwill recorded on the acquisition was R$28,326 and it is expected to be deductible for tax purposes after the Company incorporates the acquiree. For
the purposes of impairment testing, the goodwill has been allocated to the Supplemental operating segment.
The goodwill is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Me Salva! with those of the
Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were
considered by management as appropriate.
Transaction costs
Transaction costs of R$486 were expensed and are included in general and administrative expenses as of December 31, 2021.
(b)
Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A. ("Eduqo”)
On July 1, 2021, the Company acquired control of Eduqo, by acquiring 100% of the outstanding shares on the acquisition date.
Eduqo provides educational services, acting specifically in the Learning Management System (LMS) segment.
The purchase consideration transferred was R$31,970, comprised of: (i) R$15,097 cash consideration paid on the acquisition date; (ii) R$16,076 related to seller
financing, representing the present value of fixed price that will be paid in two installments on each anniversary date of the transaction, and (iii) of R$797
determined as an acquisition price adjustment. See Note 17 for further information.
The Company did not recognize deferred taxes related to the business combination because the tax basis and the accounting basis, including fair value
adjustments, were the same at the date of the business combination.
Goodwill
The goodwill recorded on the acquisition was R$22,422 and it is expected to be deductible for tax purposes after the Company incorporates the acquiree. For
the purposes of impairment testing, the goodwill has been allocated to the Supplemental operating segment.
The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Eduqo with those of
the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were
considered by management as appropriate.
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Table of Contents
Transaction costs
Transaction costs of R$390 were expensed and are included in general and administrative expenses as of December 31, 2021.
(c)
Desenvoolva – Educação, Treinamento e Consultoria Corporativa Ltda. ("Edupass”)
On September 3, 2021, the Company acquired control of Edupass, by acquiring 100% of the outstanding shares on the acquisition date.
Edupass connects education institutions with companies and professionals, helping employees in their career development.
The purchase consideration was R$ 15,229, comprised of: (i) R$ 2,000 cash consideration paid on the acquisition date; (ii) R$ 1,975 related to seller financing
which will be paid in two installments on each anniversary of the transaction; and (iii) an additional earn-out of R$ 11,254, representing the present value of
the amount that will be paid in 2024. Because the R$ 11,254 is not a fixed price but subject to a formula, the Company considers the payment as contingent
consideration and the liability is measured at FVPL.
The Company did not recognize deferred taxes related to the business combination because the tax basis and the accounting basis, including fair value
adjustments, were the same at the date of the business combination.
Goodwill
The goodwill recorded on the acquisition was R$ 11,679 and it is expected to be deductible for tax purposes after the Company incorporates the acquiree. For
the purposes of impairment testing, the goodwill has been allocated to the Supplemental operating segment.
The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Edupass with those of
the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were
considered by the administration as appropriate.
Transaction costs
Transaction costs of R$ 191 were expensed and are included in general and administrative expenses as of December 31, 2021.
(d)
P2D Educação Ltda. ("P2D”)
On March 6, 2021, the Company announced that it entered into a definitive agreement to acquire COC and Dom Bosco, two important K-12 learning systems in
Brazil.
On October 1, 2021, Arco concluded the acquisition of 100% of the capital stock of P2D.
The purchase consideration was R$ 780,571, comprised of: (i) R$ 788,985 cash consideration paid on the acquisition date; and (ii) R$ 8,414 of price adjustments
calculated after the acquisition, to be paid by Pearson, reducing the acquisition price. The price adjustment is under discussion between both parties and its
payment is more likely to occur in the first semester of 2022.
The transaction was subject to customary closing conditions, including antitrust and other regulatory approvals. After the preliminary antitrust approval from
Brazil’s Administrative Council for Economic Defense – CADE, which occurred on September 30, 2021, Arco closed the acquisition of P2D on October 1, 2021,
becoming a subsidiary of Company.
The Company did not recognize deferred taxes related to the business combination because the tax basis and the accounting basis, including fair value
adjustments, were the same at the date of the business combination.
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Goodwill
The goodwill recorded on the acquisition was R$ 560,075 and it is expected to be deductible for tax purposes after the Company incorporates the acquiree. For
the purposes of impairment testing, the goodwill has been allocated to the Core operating segment.
The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Edupass with those of
the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were
considered by the administration as appropriate.
Transaction costs
Transaction costs of R$ 13,629 were expensed and are included in general and administrative expenses as of December 31, 2021.
(e)
WPensar S.A. ("WPensar”)
WPensar is a company engaged in the development and licensing of software, related to school management systems.
The Company bought, as a first step, a 25.0% stake in the entity in April 2015 for R$ 5,000, of which R$ 4,777 related to the consideration transferred as capital
contribution and R$ 223 to the initial recognition of asymmetrical put and call options. Pursuant to the investment and share purchase agreement for the
acquisition of WPensar, Arco purchased the remaining 75.0% on September 21, 2020.
The purchase consideration transferred was R$ 23,908, consisting of R$ 14,345 paid at the acquisition date, R$ 3,586 retained until September 30, 2021 as a
guarantee for any losses and R$ 5,977 regarding the fair value of the previously held interest. At the date of acquisition, the carrying amount of the investment
previously held interest was R$ 2,729, resulting in a gain in step acquisition of R$ 3,248. The amount will be released in a single installment, adjusted by
Interbank certificates of deposit (CDI). On the due date, if there are no losses, the amount will be paid to the selling shareholders.
The Company did not recognize any deferred taxes related to the business combination because the tax basis and accounting basis, including fair value
adjustments, were the same at the acquisition date.
Goodwill
The goodwill acquired on the acquisition was R$ 18,994 and is expected to be deductible for tax purposes after the Company merges the acquiree. For the
purposes of impairment testing, the goodwill has been allocated to the Supplemental operating segment.
The goodwill recognized is primarily attributable to the expected synergies and other benefits from combining the assets and activities of WPensar with those
of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were
considered by the administration as appropriate.
Transaction costs
Transaction costs of R$ 115 were expensed and are included in general and administrative expenses on December 31, 2020.
(f)
Studos Software Ltda. ("Studos”)
On September 21, 2020, the Company acquired control of Studos, by acquiring 100% of the outstanding ordinary shares and voting interests.
Studos is a platform that contributes to enrich students’ learning and optimize teachers’ time, in addition to providing simplified management for coordinators.
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The purchase consideration transferred was R$ 19,533. The amount of R$ 8,298 was paid on the acquisition date and R$ 11,235 has been retained for the period
of 2 years and is conditioned to the performance of the entity. The amount will be released in two annual installments.
The Company did not recognize deferred taxes related to the business combination because the tax basis and the accounting basis, including fair value
adjustments, were the same at the date of the business combination.
Goodwill
The goodwill recorded on the acquisition was R$ 13,371 and it is expected to be deductible for tax purposes after the Company merges the acquiree. For the
purposes of impairment testing, the goodwill has been allocated to the Supplemental operating segment.
The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Studos with those of
the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were
considered by the administration as appropriate.
Transaction costs
Transaction costs of R$ 275 were expensed and are included in general and administrative expenses on December 31, 2020.
(g)
Geekie Desenvolvimento de Softwares S.A. ("Geekie”)
Geekie Desenvolvimento de Software S.A. is an entity that provides technology for adaptive assessment and learning products and engages in the
production, development and licensing of software tailored to the specific requirements of education sector customers.
In December 2016, the Company acquired a 6.54% interest in Geekie, Based on the agreement signed by Geekie’s shareholders, the Company exercised
significant influence over the investment, as the Company: (i) had representation on the board of directors; (ii) participated in strategic decision making
regarding all relevant matters; (iii) approved all products launched by Geekie; and (iv) provided essential technical information (Geekie’s products are based
on the Company’s educational content). At that date, the Company entered into an agreement through which it had a call option, and the sellers had a put
option over the remaining shares. The price would be determined by the greater of the multiple of the Company’s EBITDA for 2021 multiplied by Geekie’s
EBITDA, including any cash or debt; or 10 times Geekie’s EBITDA for 2021, less net debt. The put option could be exercised between the period beginning on
May 1, 2022, through May 31, 2022. Call and put options were recorded at fair value, calculated through the multiple scenarios method – Monte Carlo. Any
adjustment to the fair value was recognized as finance income (costs) in the statement of income (loss).
The amount to acquire the 6.54% interest of R$8,000 was paid in January 2017, of which R$4,000 was a capital contribution and R$4,000 was paid to the selling
shareholders.
The Company agreed with the selling shareholders that if in June 2018 the cash and cash equivalents of Geekie were lower than a threshold of R$5,000, the
Company would have to subscribe capital in the amount of R$2,000.
On July 2, 2018, the extraordinary shareholders’ meeting authorized the acquisition of an additional 1.51% interest in the equity of Geekie, increasing the
Company’s share from 6.54% to 8.05% through a capital increase of R$2,000. The capital increase was fully paid on July 3, 2018. The additional investment did
not change the Company’s influence in Geekie and had the purpose to support Geekie’s working capital needs.
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On September 20, 2019, Arco acquired an additional 0.96% interest in the share capital of Geekie through a capital increase of R$1,218 increasing the
Company’s total interest to 9.01%. On October 14, 2019, Arco acquired an additional 1.92% interest in the share capital of Geekie through a capital increase of
R$2,500 increasing its total interest to 10.92%. In addition, on October 25, 2019, Arco acquired an additional 18.44% interest in the share capital of Geekie from
a minority shareholder for R$21,892 increasing its total interest to 29.36%. On November 15, 2019, Arco acquired an additional 1.17% interest in the share
capital of Geekie through a capital increase of R$2,000 increasing its total interest to 30.53%. In December 2019, Arco acquired an additional 7.00% interest in
the share capital of Geekie through a capital increase of R$4,282 and the purchase of minority shareholders for R$5,761 increasing its total interest to 37.53% as
of December 31, 2019. On March 4, 2020, Arco acquired an additional 10.51% interest in the share capital of Geekie through the purchase of shares from
minority shareholders in the amount of R$12.676, increasing its total interest to 48.04%. On July 06, 2020, Arco acquired an additional 4.62% interest in
Geekie’s share capital from minority shareholders for R$5,782, increasing its total interest to 52.67%. Notwithstanding this acquisition, at that date, based on
the existing shareholders ‘agreement the Company did not control Geekie. On September 21, 2020, Arco acquired a 1.76% interest in the share capital of Geekie
through a capital increase of R$4,500 increasing its total interest to 54.43%. On November 11, 2020, Arco acquired an additional 1.64% interest in Geekie’s
share capital through a capital increase of R$4,500 increasing its total interest to 56.06%.
On November 27, 2020, the Company signed a new shareholders’ agreement and based on the new terms defined, on that date the Company acquired control
of Geekie. With the change in the composition of the Board of Directors the Company has power to decide on Geekie’s operations. The financial statements of
Geekie were consolidated from the date the Company acquired control and the acquisition was accounted for as a business combination.
On January 20, 2021, Arco acquired an additional 1.36% interest in Geekie’s share capital through a capital increase of R$4,000, increasing its total interest to
57.42%.
The shareholders entered a firm commitment on the 42,58% of the remaining interest held by the non-controlling shareholders exercisable until January 2023,
because the terms are non-cancelable in any way.
The terms of the firm commitment were assessed to determine as to whether they expose the Company to the risks and rewards associated with the actual
ownership of such shares during the period of the firm commitment contract.
The Company accounted for the firm commitment under the anticipated-acquisition method, and the non-controlling interest subject to that is deemed to have
been acquired at the date of acquisition of the control. Accordingly, upon obtaining control, the Company also consolidated the interest currently legally held
by the non-controlling shareholder and recognized a financial liability that will be eventually settled when the non-cancelable firm commitment option is
exercised.
The financial liability was recorded at the present value of the estimated amount payable to the non-controlling shareholder upon the exercise of the firm
commitment discounted to present value using an estimated interest rate of 13.15%. Any dividends payable to non-controlling shareholder will recorded as
interest expense.
The purchase consideration transferred amounted to R$187,979, comprised of: (i) cash consideration in the amount of R$4,500 through capital contribution
paid on the same month of acquisition; (ii) R$115,222 regarding a forward contract and (iii) R$68,257 regarding a fair value of previously held interest in a step
acquisition.
At the date of acquisition, the carrying amount of the investment previously held interest was R$71,812, resulting in a loss in step acquisition of R$3,555. The
exercise price is variable and conditioned to the performance of the entity and is based on multiples of 2022 ACV book value and revenue as described in Note
17.i).
Goodwill
The goodwill recorded on the acquisition was R$158,552 and it is expected to be deductible for tax purposes after the Company merges the acquiree. For the
purposes of impairment testing, the goodwill has been allocated to the Core operating segment.
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The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Geekie with those of
the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were
considered by the administration as appropriate.
Transaction costs
Transaction costs of R$762 were expensed and are included in general and administrative expenses on December 31, 2020.
(h)
Escola da Inteligência Cursos Educacionais Ltda. ("EI” or "Escola da Inteligência”)
On August 28, 2020, the Company announced that it entered into a definitive agreement to acquire Escola da Inteligência, the leading solution in social-
emotional learning (SEL) in Brazil.
This transaction broadens Arco’s supplemental market presence by adding a strong brand to its portfolio. Arco believes there is a favorable market trend for
SEL, pushed forward by the COVID-19 pandemic, and that EI is well positioned to capture this demand outside and within Arco’s school base.
The acquisition involves only the private sector business of Escola da Inteligência and under the terms of the transaction, Arco will acquire 100% of EI’s
shares for R$496,034, of which R$200,000 was paid at closing, the amount of R$88,000 was paid in the second quarter of 2021, concluding the first stage of
acquisition corresponding to 60% of EI’s shares. The remaining 40% of EI’s shares is estimated in R$208,150, subject to adjustments related to multiples of
2023 ACV book value plus cash generation multiplied by 40%. The amount will be paid in the second quarter of 2023.
The amount of R$ 4,620 was determined as an "acquisition price adjustment”, which was calculated based on the difference between net debt less the working
capital and was paid to the selling shareholders in April 30, 2021.
The transaction was subject to customary closing conditions, including antitrust and other regulatory approvals. After the preliminary antitrust approval from
Brazil’s Administrative Council for Economic Defense – CADE, which occurred on November 13, 2020, Arco closed the acquisition of EI on December 2, 2020,
becoming a subsidiary of Company.
Goodwill
The goodwill recorded on the acquisition was R$219,715 and it is expected to be deductible for tax purposes after the Company merges the acquiree. For the
purposes of impairment testing, the goodwill has been allocated to the Supplemental operating segment.
The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Escola da Inteligência
with those of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business
assumptions used were considered by the administration as appropriate.
Transaction costs
Transaction costs of R$6,510 were expensed and are included in general and administrative expenses on December 31, 2020.
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Table of Contents
(i)
Measurement of fair value
The valuation techniques used for measuring the fair value of separate identified intangible assets acquired were as follows:
Entity
Me Salva!
Eduqo
Edupass
P2D
WPensar
Studos
Escola da Inteligência
Me Salva!
Eduqo
Edupass
P2D
WPensar
Studos
Escola da Inteligência
Me Salva!
Edupass
P2D
Geekie
Escola da Inteligência
Me Salva!
Eduqo
Edupass
WPensar
Me Salva!
Eduqo
P2D
Asset acquired
Customer relationship
Non-compete agreement
Trademarks
Software
Educational platform
Studos
Escola da Inteligência
Educational system
Valuation technique
Multi-period excess earning method
The method considers the present value of net cash flows
expected to be generated by customer relationship, by
excluding any cash flows related to contributory assets
With-and-without method
The With-and-Without method consists of estimating the fair
value of an asset by the difference between the value of this
asset in two scenarios: a scenario considering the existence of
the asset in question and another, considering its non-
existence.
Relief-from-royalty method
The relief-from-royalty method considers the discount
estimated royalty payments that are expected to be avoided as
a result of the educational platform being owned.
Replacement cost
The method considers the amount that an entity would have to
pay to replace at the present time, according to its current
worth.
Replacement cost
The method considers the amount that an entity would have to
pay to replace at the present time, according to its current
worth.
Relief-from-royalty method
The relief-from-royalty method considers the discount
estimated royalty payments that are expected to be avoided as
a result of the educational platform being owned.
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Table of Contents
(j)
Revenue and profit contribution
The individual net revenue and net income from the acquisition date through each period end for all business combinations are presented below:
Total net revenue
Net income (loss) before income taxes
Total net revenue
Net income (loss) before income taxes
December 31, 2021
Me Salva!
Eduqo
Edupass
6,929
(4,961)
2,511
988
434
(505)
P2D
38,081
7,497
WPensar
1,126
(89)
Studos
2020
Geekie
282
(249)
18,497
(11,035)
EI
14,779
10,429
Total revenue and income (loss) before income taxes for the Company are presented below assuming the acquisitions had occurred at the beginning of the
year:
Total net revenue
Net income (loss) before income taxes
2021
1,271,921
(185,101)
2020
1,078,831
32,208
This additional financial information is presented for informational purposes only and does not purport to represent what the Company’s results of operations
would have been had it completed the acquisition on the date assumed, nor is it necessarily indicative of the results that may be expected in future periods.
5 Cash and cash equivalents
Cash and bank deposits
Bank deposits in foreign currency (a)
Cash equivalents (b)
(a) Short-term deposits maintained in U.S. dollar.
2021
20,085
154
190,904
211,143
2020
7,536
28,327
388,547
424,410
(b) Cash equivalents correspond to financial investments in Bank Certificates of Deposit ("CDB”) issued by highly credit-rated financial institutions. As of
December 31, 2021, the average interest on these CDBs was equivalent to 90.4% (December 31, 2020: 95.4%) of the Interbank Certificates of Deposit
("CDI”). The average CDI rate during the year ended December 31, 2021 was 4,39% (December 31, 2020: 2,76%) These financial investments are available
for immediate use and have insignificant risk of changes in value.
6 Financial investments
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Financial investments (a)
Financial investments in foreign currency
Other
Current
Non-current
2021
1,013,550
—
506
1,014,056
973,294
40,762
2020
721,935
542
517
722,994
712,645
10,349
(a) Financial investments correspond mainly to investments in bank deposit certificates (CDB) and automatic applications, managed by highly credit-rated
financial institutions. As of December 31, 2021, the average interest on these investments is equivalent to 101.7% (2020: 101.3%) of the CDI. The average
CDI rate during the year ended December 31, 2021 was 4,39% (December 31, 2020: 2,76)%.
7 Trade receivables
From sales of educational content
From related parties (Note 10)
(-) Allowance for doubtful accounts
As of December 31, 2021 and 2020, the aging of trade receivables was as follows:
Neither past due nor impaired
Past due
1 to 60 days
61 to 90 days
91 to 120 days
121 to 180 days
More than 180 days
2021
676,787
3,608
680,395
(87,132)
593,263
2020
475,507
3,209
478,716
(63,434)
415,282
2021
567,490
2020
360,737
112,905
117,979
15,383
8,403
10,347
16,284
62,488
680,395
26,206
9,973
10,528
18,887
52,385
478,716
The Company reviews its bad debt provision at least twice a year following a detailed review of receivable balances and historical payment profiles, and
assessment of forward-looking risk factors. Management believes all the remaining receivable balances are fully recoverable.
The movement in the allowance for doubtful accounts for the years ended December 31, 2021, 2020 and 2019, was as follows:
Balance at beginning of the year
Additions
Receivables written off during the period as uncollectible
Balance at end of year
8 Inventories
F-48
2021
(63,434)
(26,610)
2,912
(87,132)
2020
(30,051)
(34,684)
1,301
(63,434)
2019
(13,419)
(17,392)
760
(30,051)
Table of Contents
Educational content
Educational content in progress (a)
Consumables and supplies
Inventories held by third parties
2021
75,778
71,314
2,128
9,362
158,582
2020
30,167
37,276
1,198
5,435
74,076
(a) Costs being incurred to produce 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).
The increase in 2021 balances is mainly related to:
● Change in the supply contract at our subsidiary Companhia Brasileira de Educação e Sistemas de Ensino S.A. While the previous contract provided for production in
accordance with the Company's demand level (just in time), the current contract provides that the production of goods in accordance with the demand for materials
for the entire next quarter; and
● Increase from inventories of companies acquired in 2021.
Educational content is presented net of inventory reserve. The movement in the inventory reserve for the years ended December 31, 2021, 2020 and 2019 was
as follows:
Balance at beginning of the year
Inventory reserve
Write-off of inventories against reserve
Balance at end of year
9 Recoverable taxes
Withholding Income Tax (IRRF) on financial investments (a)
Recoverable IRPJ and CSLL
Recoverable PIS and COFINS
Other recoverable taxes
Current
Non-current
(a) Withholding income tax (IRRF) will be utilized to offset federal taxes payable.
F-49
2021
(7,510)
(26,778)
8,573
(25,715)
2020
2019
(6,517)
(7,453)
6,460
(7,510)
(4,403)
(8,476)
6,362
(6,517)
2021
2020
3,079
11,400
44,097
2,451
61,027
38,811
22,216
2,027
8,573
7,250
2,575
20,425
19,304
1,121
Table of Contents
10 Related parties
The table below summarizes the balances and transactions with related parties:
Assets
Trade receivables
Livraria ASC Ltda. and Educadora ASC Ltda. (a)
OISA Tecnologia e Serviços Ltda. (g)
Other assets
Arco Instituto de Educação (b)
Loans to related parties
Minority shareholders - Geekie (c)
OISA Tecnologia e Serviços Ltda. (d)
Minority shareholders - EI (e)
Former shareholders - Eduqo (f)
Former shareholders - Edupass (f)
Current
Non-current
Advances from customers
Livraria ASC Ltda. and Educadora ASC Ltda. (a)
Other liabilities
OISA Tecnologia e Serviços Ltda. (g)
Net revenue
Livraria ASC Ltda. and Educadora ASC Ltda. (a)
OISA Tecnologia e Serviços Ltda. (g)
Expenses
ASC Empreendimentos Ltda. and OSC Empreendimentos Ltda.
Finance income
WPensar S.A.
Minority shareholders - Geekie(c)
OISA Tecnologia e Serviços Ltda. (d)
Minority shareholders - EI (e)
2021
2020
3,546
62
3,608
1,373
1,373
4,571
—
6,750
4
65
11,390
4,571
6,819
9
9
258
258
3,209
—
3,209
—
—
4,361
5,018
11,099
—
—
20,478
9,970
10,508
150
150
469
469
2021
2020
2019
8,831
226
9,057
—
—
210
19
336
565
7,230
4
7,234
8,805
—
8,805
(1)
(8)
30
453
18
18
519
72
813
—
—
885
(a) Companhia Brasileira de Educação e Sistemas de Ensino and International School sell educational content to Livraria ASC Ltda. and Educadora ASC
Ltda., entities under common control of the Company’s controlling shareholders. The transactions are priced based on contract price at the sales date.
Sales price for these transactions are conducted at arm’s length, at similar observable market prices.
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Table of Contents
(b) Arco is a founding member of Instituto Arco de Educação ("Arco Instituto”), a non-profit association whose purpose is to support and encourage
education through the generation of knowledge. The Company has amounts receivable from Arco Instituto arising from the reimbursement of expenses
paid by Arco. The amounts are not subject to financial charges and the payment term is under negotiation between the parties.
(c) On January 17, 2019, the Company loaned R$ 4,000 to the current minority shareholders of Geekie, through a loan agreement with payment due in
June 2022, interest of 110% of the CDI, and with their entire interest in Geekie’s shares as collateral to the transaction. During the year ended December
31, 2021, the Company recognized R$210 of interest income. The transaction was intended to support Geekie’s working capital needs.
(d) On October 23, 2020, the Company loaned R$5,000 to OISA Tecnologia e Serviços Ltda. ("ISAAC”), an affiliate of the Company, at that date, and which a
member of its key management personnel was a Director of the Company until October 9, 2020. The entity is developing a project to assist schools in
financial and administrative management. The amount was paid in February 2021 and the Company recognized R$19 of interest income.
(e) Amount due from minority shareholders of Escola da Inteligência, with an interest rate of 100% CDI and maturing in May 2023. During the year, the
Company recognized R$336 of interest income.
(f) Amount due from former shareholders of Eduqo and Edupass, which the payment is under negotiation between the parties. The amounts are not subject
to financial charges.
(g) WPensar provides financial intermediation services to OISA. Amounts collected by WPensar are transferred to OISA net of the value of the service
provided. As of December 31, 2021, the amount to be transferred to OISA is R$ 258, the amount of receivables from services is R$62 and during the year
the recognized revenue from financial intermediation was R$226.
Key management personnel compensation
Key management personnel compensation comprised the following:
Short-term employee benefits
Restricted stock units
2021
60,845
51,231
112,076
2020
39,628
48,852
88,480
2019
13,732
66,429
80,161
Compensation of the Company’s key management includes short-term employee benefits comprised by salaries, bonuses, labor and social charges, and other
ordinary short-term employee benefits.
Certain executive officers also participate in the Company’s share-based compensation plan (Note 18.b).
11 Investments and interests in other entities
(a) Investments
Bewater Ventures I GA Fundo de Investimento em Participações Multiestratégia ("Bewater”)
On July 24, 2020, the Company, through its subsidiary Companhia Brasileira de Educação e Sistemas de Ensino S.A. ("CBE”) acquired 9,670 Class B quotas of
Bewater Ventures I GA Fundo de Investimento em Participações Multiestratégia, a fund managed by Paraty Capital. The Company paid R$9,670,
corresponding to a total interest of 14.5% in Bewater. On February 2, 2021, Bewater carried out a new round of capital injection, in which the Company
acquired an additional 27 class B quotas, resulting in an 11.1% interest in the fund due to the dilution of its interest. On August 12, 2021, Bewater had a new
round of investments, in which the Company acquired an additional 16 class B quotas, resulting in an 11.0% interest in the fund.
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Table of Contents
The fund made a minority investment in Group A, a company that provides educational solutions for higher education. The investment in Bewater is measured
at fair value through profit and loss.
INCO Limited ("INCO”)
On January 25, 2021, the Company entered into a Share Purchase Agreement with INCO Limited, or INCO, the controlling entity of OISA, a company that
provides financial and administrative services to private schools, according to which 8,571,427 series B ordinary shares were acquired, equivalent to 30% of
the total stock capital of INCO, for a total amount of R$25,000. On April 27, 2021, Arco invested R$ 33,195, and an additional R$ 52,035 on September 27, 2021,
and now holds an 26.09% interest due to the dilution of its interest.
As of December 31, 2021, the Company had a gain of R$ 14,022 resulting from the dilution of its interest in INCO’s equity. This amount is recognized in Other
income (expenses) in profit and loss.
Based on the signed agreement, the Company does not have control of INCO but exercises significant influence over the entity since it is one member of
INCO’s Board of Directors.
Tera Treinamentos Profissionais Ltda ("Tera”)
On April 9, 2021, the Company entered into a Share Purchase Agreement with Tera Treinamentos Profissionais Ltda, a company that provides professional
courses focused on the development of digital skills, according to which 8,234 shares were acquired, equivalent to 23,43% of the total stock capital of Tera, for
a total amount of R$15,000. Based on the signed agreement, the Company does not have control of Tera but exercises significant influence over the entity.
(i) Investments and interests in other entities
Reconciliation of carrying amount:
At beginning of the year
Capital contributions
Acquisition from a minority shareholder
Fair value on investment
Gain of changes in ownership
Share of loss of equity-accounted investees
Consolidation on the acquisition of control
At end of the year
INCO
—
110,230
—
—
14,022
(21,831)
—
102,421
2021
TERA Bewater
Total
—
15,000
—
—
—
(351)
—
14,649
9,654
43
—
106
—
—
—
9,803
9,654
125,273
—
106
14,022
(22,182)
—
126,873
2020
Total
48,574
14,170
18,458
(16)
—
409
(71,941)
9,654
Percentage of ownership
26.09 %
23.43 %
11.03 %
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Table of Contents
12 Property and equipment
Reconciliation of carrying amount:
Cost
As of December 31, 2019
Additions
Disposals
Business combination
As of December 31, 2020
Additions
Disposals
Business combination
As of December 31, 2021
Depreciation
As of December 31, 2019
Depreciation charge for the period
Depreciation of disposals
As of December 31, 2020
Depreciation charge for the period
Depreciation of disposals
As of December 31, 2021
Net book value
As of December 31, 2019
As of December 31, 2020
As of December 31, 2021
Machinery
and
Furniture
and
IT
Leasehold
equipment Vehicles fixtures equipment Facilities improvements Others Total
1,257
146
(37)
625
1,991
453
(67)
10
2,387
(221)
(136)
104
(253)
(391)
32
(612)
1,036
1,738
1,775
121
—
—
186
307
—
—
—
307
(100)
(26)
—
(126)
(72)
—
(198)
21
181
109
2,353
1,365
(114)
325
3,929
759
(222)
65
4,531
(379)
(327)
—
(706)
(478)
26
(1,158)
7,272
4,612
(1,289)
2,300
12,895
56,290
(432)
413
69,166
(1,395)
(2,279)
13
(3,661)
(4,529)
185
(8,005)
1,974
3,223
3,373
5,877
9,234
61,161
80
38
—
5
123
112
—
—
235
(26)
(9)
—
(35)
(16)
1
(50)
54
88
185
10,034
4,239
—
205
14,478
1,381
—
50
15,909
(2,225)
(2,391)
—
(4,616)
(4,419)
—
(9,035)
7,234
422
(934)
—
6,722
1,083
(415)
—
7,390
(2,677)
(2,284)
—
(4,961)
(2,021)
—
(6,982)
28,351
10,822
(2,374)
3,646
40,445
60,078
(1,136)
538
99,925
(7,023)
(7,452)
117
(14,358)
(11,926)
244
(26,040)
7,809
9,862
6,874
4,557
1,761
408
21,328
26,087
73,885
The increase in the year ended December 31, 2021, is mainly due to purchase of IT equipment for subsidiary Geekie.
The Company assesses at each reporting date, whether there is an indication that a property and equipment asset may be impaired. If any indication exists, the
Company estimates the asset’s recoverable amount. There were no indications of impairment of property and equipment as of and for the years ended
December 31, 2021, 2020 and 2019.
13 Leases
The balance sheet shows the following amounts relating to leases:
Right-of-use assets
Properties
Machinery and equipment
Lease liabilities
Current
Non-current
2021
2020
35,221
739
35,960
29,938
84
30,022
2021
2020
20,122
22,996
43,118
12,742
22,478
35,220
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Table of Contents
Set out below, are the carrying amounts of the Company’s right-of-use assets and lease liabilities and the movements during the period:
As at January 1, 2020
Additions
Disposal
Lease modification (a)
Depreciation expense
Business combination
Interest expense
Payments of lease liabilities
Discounts on leases
Interest paid
As at December 31, 2020
Additions
Disposal
Lease modification (a)
Depreciation expense
Business combination
Interest expense
Payments of lease liabilities
Discounts on leases
Interest paid
As at December 31, 2021
Average annual depreciation rate 2020
Average annual depreciation rate 2021
(a) Refers to price adjustments that occur annually as defined in the lease agreements.
Right-of-use
assets –
Properties
Lease
Liabilities
25,857
12,391
(244)
2,080
—
2,710
3,036
(8,160)
(350)
(2,100)
35,220
22,146
(329)
200
—
382
4,795
(15,729)
(273)
(3,294)
43,118
21,631
12,391
(253)
2,080
(8,537)
2,710
—
—
—
—
30,022
22,146
(334)
200
(16,456)
382
—
—
—
—
35,960
27.5 %
29.4 %
The Company entered into fiduciary agreements with Banco Safra S.A. in the amount of R$10,903 to guarantee payment due in the lease agreements of the São
Paulo office. This financial agreement bears interest at the rate of 1.95% per annum. The lease payments are adjusted annually by the General Market Price
Index (IGP-M).
The Company recognized rent expense from short-term leases and low-value assets of R$2,673 for the year ended December 31, 2021 (2020: R$2,329)
14 Intangible assets and goodwill
F-54
Table of Contents
Cost
As of December 31, 2019
Acquisitions
Disposals
Acquisitions through business
combinations
Transfer
As of December 31, 2020
Acquisitions (a)
Disposals
Acquisitions through business
combinations
Finalization of price allocation (b)
Transfer
As of December 31, 2021
Amortization
As of December 31, 2019
Amortization
Amortization of disposals
As of December 31, 2020
Amortization
Amortization of disposals
As of December 31, 2021
Net book value
As of December 31, 2019
As of December 31, 2020
As of December 31, 2021
Rights on
Goodwill contracts relationships
Customer
Educational
system Copyrights development Trademarks platform agreement In Progress
Software
license and
Educational
Non-
compete
916,767
—
—
477,584
—
1,394,351
—
—
622,502
(66,952)
—
1,949,901
—
—
—
—
—
—
—
916,767
1,394,351
1,949,901
15,263
—
—
—
—
15,263
—
—
—
—
—
15,263
(5,291)
(1,527)
—
(6,818)
(1,735)
—
(8,553)
9,972
8,445
6,710
206,971
—
—
115,172
—
322,143
—
—
26,197
—
—
348,340
(14,010)
(24,227)
—
(38,237)
(35,368)
—
(73,605)
192,961
283,906
274,735
251,223
—
—
29,775
—
280,998
—
—
45,138
—
—
326,136
(22,234)
(26,941)
—
(49,175)
(33,682)
—
(82,857)
228,989
231,823
243,279
21,069
8,131
(3)
14
249
29,460
7,914
—
179
—
—
37,553
(11,682)
(6,421)
—
(18,103)
(8,031)
—
(26,134)
9,387
11,357
11,419
18,412
22,127
(94)
5,103
(231)
45,317
43,569
(9)
10,023
—
—
98,900
(2,955)
(6,789)
3
(9,741)
(16,561)
11
(26,291)
15,457
35,576
72,609
355,298
3
—
121,053
—
476,354
101
—
66,250
—
—
542,705
(8,241)
(19,074)
—
(27,315)
(26,559)
—
(53,874)
347,057
449,039
488,831
87,987
51,262
(4,607)
13,102
22,604
170,348
75,516
(252)
39,771
—
23,018
308,401
(13,773)
(35,072)
2,681
(46,164)
(66,970)
239
(112,895)
74,214
124,184
195,506
8,303
431
—
3,122
—
11,856
985
—
5,450
—
—
18,291
(810)
(1,947)
—
(2,757)
(3,236)
—
(5,993)
7,493
9,099
12,298
Total
1,890,899
96,827
(4,704)
764,925
—
2,747,947
151,318
(261)
815,510
(66,952)
—
3,647,562
(78,996)
(121,998)
2,684
(198,310)
(192,142)
250
(390,202)
9,606
14,873
—
—
(22,622)
1,857
23,233
—
—
—
(23,018)
2,072
—
—
—
—
—
—
—
9,606
1,857
2,072
1,811,903
2,549,637
3,257,360
(a) The acquisitions of the period are mainly due to the development of educational content from the 2021 school year, development of technology platforms
for the supply of digital content, as well as licenses and software development for new projects.
(b) Refers to the Geekie and EI purchase price allocation adjustment made upon completion of the calculation of the fair value of intangible assets in
accordance with the period defined by IFRS 3. During the measurement period, the Company obtained new information about facts and circumstances
that existed at the acquisition date, mainly related to the change in the projections used to define the purchase price allocation and recognized an
adjustment in goodwill and accounts payable to selling shareholders to reflect the new information obtained.
(a) Goodwill
The carrying amount of goodwill by operating segment was:
Core
Supplemental
Impairment test for goodwill
2021
1,474,166
475,735
1,949,901
2020
918,091
476,260
1,394,351
The Company tests at least annually the recoverability of the carrying amount of each operating segment. The process of estimating these values involves the
use of assumptions, judgments and estimates of future cash flows that represent the Company’s best estimate.
F-55
Table of Contents
Goodwill is monitored by management at the level of cash generating unit, which is the same of the two operating segments. The Core and Supplemental
operating segments had an important cash flow improvement as they have increased their number of students and achieved greater scale that positively
impact the gross margin.
The value-in-use calculation is based on cash flow projections and financial budgets approved by management for a period of five years. Cash flows beyond
the five-year period were extrapolated using an estimated growth rate. The growth rate does not exceed the average long-term rate for the industry. The value-
in-use of the Core operating segment calculated for 2021 was R$3,695,227 (R$2,372,829 in 2020), and the carrying amount was R$2,849,081. The value-in-use of
the Supplemental operating segment for 2021 was R$1,758,097 (R$ 1,349,754 in 2020), and the carrying amount was R$853,142.
The value-in-use calculations were based on the discounted cash flow model and are based on the following assumptions for those segments:
Core
Supplemental
Significant estimate: impact of possible changes in key assumptions
Budget period
growth rate
Growth rate
beyond budget
period
Discount rate
2021 2020 2021 2020 2021 2020
3.3 %
3.3 %
13.8 %
9.2 %
16.4 % 17.3 %
3.2 % 11.7 %
3.2 % 12.9 %
11.1 %
12.4 %
A decrease in management estimated gross margin used in the value-in-use calculation for the Core operating segment as of December 31, 2021 to 79.2%,
would have not resulted in the recognition of an impairment of goodwill. Also, the Company performed the same analysis for the Supplemental operating
segment, a decrease to 85.9% and concluded it would have not resulted in the recognition of an impairment of goodwill.
In addition, an increase to 11.1% in management’s estimated discount rate applied to the cash flow projections of the Core operating segment for the year
ended December 31, 2021, would have not resulted in the recognition of an impairment of goodwill.
Also, the Company performed the same sensitivity analysis for the Supplemental operating segment (12.4% instead of 12.9%) and concluded it would have
not resulted in the recognition of an impairment of goodwill.
There was no goodwill impairment for the years ended December 31, 2021, 2020 and 2019.
(b) Other intangible assets
Intangible assets, other than goodwill, are valued separately for each acquisition and are amortized over their respective useful lives. The useful lives and
methods of amortization of other intangibles are reviewed each financial year end and adjusted prospectively, if appropriate.
The estimated useful lives of intangible assets for the years ended December 31, 2021, are as follows:
Rights on contracts
Customer relationships
Educational system
Copyrights
Software license
Trademarks
Educational platform
Non-compete agreement
F-56
Years
10
5 to 16
3 to 10
3
2 to 5
10 to 20
3 to 10
2 to 5
Table of Contents
For the years 2021, 2020 and 2019 there were no indicators that the Company’s intangible assets with definite lives might be impaired.
15 Loans and financing
Bank loan
Bank loan
Bank loan
Bank loan
Debentures (a)
Bank loan (b)
Bank loan (c)
Bank loan
Bank loan (d)
Convertible notes (e)
Current
Non-current
Interest rate
100% CDI + 2.7% pa
100% CDI + 2.7% pa
8.1% pa
8.2% pa
100% CDI + 1.7% pa
3.7% pa
3.8% pa
3.8% pa
USD + 2.4% pa
8.0% pa
Maturity
December/2021
January/2022
March/2022
May/2022
August/2023
October/2023
October/2023
November/2023
October/2024
November/2028
December
31, 2021
—
201,990
310
—
919,703
62
90
49
61,649
647,474
1,831,327
228,448
1,602,879
December
31, 2020
100,395
200,788
1,500
8,373
—
—
—
63
—
—
311,119
107,706
203,413
(a) This amount is related to issuance of debentures in August 2021 to pay the amount due on the COC and Dom Bosco acquisition and will be settled in a
single installment on August 25, 2023. The debentures bear interest of 100% CDI + 1.7% per annum, which will accrue and will also be payable on August
25, 2023. The debentures are guaranteed by Arco Educação S.A.
(b) Loan acquired by Me Salva!, the Company’s subsidiary, for working capital. The amount is being paid monthly until October 2023 and bears interest at
the rate of 3.7% per annum.
(c) Loan acquired by Eduqo, the Company’s subsidiary, for working capital. The amount is being paid monthly until October 2023 and bear interest at the
rate of 3.8% per annum.
(d) On November 11, 2021, the subsidiary Geekie entered into a loan agreement in the amount of US$11,020 thousand, equivalent to R$ 60,000, with an
interest rate of 2.452% per annum. Since the operation was contracted in U.S. dollars, the Company holds swap derivatives to protect its exposure to
foreign currency risk, which changes the effective interest rate for this loan to 100% CDI + 1.7% per annum. The loan payments will be paid quarterly in 12
installments, until October 28, 2024.
(e) On November 30, 2021, the Company issued convertible senior notes in the amount of US$150,000 with a value per share of $1.00, equivalent to R$
825,285. These notes mature in 7 years, on November 15, 2028, and bear interest at 8% per year fixed in Brazilian reais. While the interests are payable
quarterly, the principal amount will be paid in a single installment at the mature date, both in cash in United States dollars equivalents to the amount in
Brazilian reais at the payment date.
Each note can be converted at any time during the term of the contract, at the option of the holders, into Arco’s Class A common shares at the agreed
conversion rate, which is equivalent to an initial price of US$ 29 per share. Dragoneer and General Atlantic will beneficially own approximately 5.6% and
2.8%, respectively, of the total shares of Arco (on an as-converted basis for the convertible senior notes). See Note 16 for further information.
The holders also have the right to require the Company to repurchase for cash, on any date on or after November 15, 2026, all or portion of the holders’
notes, at a repurchase price that is equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interests.
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The Company determined that the convertible senior notes have an embedded put option to repurchase the convertible notes for cash. It is an embedded
derivative that is not closely related to the contract host debt instrument, because the risks inherent in the derivative (equity risk) and the host are
dissimilar. Therefore, the conversion option will be treated separately and classified as a derivative liability, see Note 16 for further information.
The host foreign currency debt will be measured subsequently at amortized cost, using the effective interest rate of 3.61% per annum, and thus is subject
to foreign exchange changes.
The initial transaction costs that are directly attributable to the issuance of the convertible notes were measured at fair value together with the financial
liability on initial measurement. The transaction cost totaled R$ 13,032, including legal counsels and advisors.
All financing arranged by Company is not subject to any financial covenants for the year ended December 31, 2021.
Set out below the movements during the year:
Balance at beginning of the year
Additions
Loan cost
Business combination
Interest expense
Interest paid
Payment of loans and financing
Exchange rate variation
Balance at end of year
16 Derivative financial assets and liabilities
The breakdown of financial derivatives is as follows:
Assets
Financial derivatives
Swap Geekie (a)
Current
Non-current
Liabilities
Financial derivative
Put option (b)
Current
Non-current
2021
311,119
1,599,880
(21,582)
210
57,245
(20,275)
(109,815)
14,545
1,831,327
2020
98,561
502,063
(3,629)
8,836
19,862
(13,423)
(301,151)
—
311,119
2021
861
861
301
560
2021
223,561
223,561
—
223,561
(a) On November 11, 2021, subsidiary Geekie entered into swap contracts to protect a foreign currency loan, with maturities between February 2022 to
October 2024, which the active end receives, on average, dollar plus 2.452% per annum and in the liability position it pays, on average, CDI plus 1.7% per
annum with fair value receivable of R$861.
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(b) Dragoneer and General Atlantic have a put option to convert their investment in the Company’s senior notes into Class A shares of the Company. The
fair value of the put option is calculated using the Black & Scholes method as of December 31, 2021.
The Company recognized an initial put option of US$32,995 separated from the fair value of the total compound financial instrument issued, comprising
the senior notes and the put option. Any adjustment to the fair value is recognized as finance income/costs in the statement of income (loss). See Note 15
for further information.
17 Accounts payable to selling shareholders
The breakdown of the liabilities regarding balances of accounts payable from business combination and investments in associates is as follows:
Accounts payable to selling shareholders
Acquisition of International School (a)
Acquisition of NS Educação Ltda. (b)
Acquisition of Escola em Movimento (c)
Acquisition of Nave à Vela (d)
Acquisition of Positivo (e)
Acquisition of WPensar (f)
Acquisition of Studos (g)
Acquisition of EI (h)
Acquisition of Geekie (i)
Acquisition of Me Salva! (j)
Acquisition of Eduqo (k)
Acquisition of Edupass (l)
Current
Non-current
2021
2020
379,501
6,126
—
—
754,451
—
5,472
234,493
224,759
21,880
18,145
23,959
1,668,786
799,553
869,233
354,950
5,724
1,024
21,941
903,428
3,605
11,349
363,502
120,992
—
—
—
1,786,515
656,014
1,130,501
(a) The amount payable is subject to an arbitration process and will be paid when the arbitration mentioned in Note 28 is completed. The amount payable is
based on realized EBITDA for the 2019 and 2020 school years. During the year ended December 31, 2021 the Company recognized R$ 23,373 of interest.
Based on the realized EBITDA for the 2019 and 2020 school years, the accounts payable increased by R$ 4,683 of adjustment during the year ended
December 31, 2021.
(b) This amount was retained for any contingent liabilities that may arise, which will be released in annual installments until December 31, 2022. The amount is
being adjusted based on the Interbank certificates of deposit (CDI) interest rate.
(c) The balance of December 31, 2020, was retained for any contingent liabilities that might arise. The amount was adjusted based on the Brazilian basic
interest rate (SELIC).) and settled in 2021.
(d) The balance at December 31, 2020 is related to the two tranches for the acquisition of the remaining 49% interest in Nave payable until February 2022. The
Company paid the second tranche in February 2021 and on the same date, as agreed between the Company and the minority shareholders, the parties
decided to accelerate the last payment. Therefore, on December 31, 2021, the Company has a 100% interest in Nave. During the year ended December 31,
2021, the Company recognized R$705 of interest.
(e) The amount represents the remaining of the acquisition price and will be paid annually in November over 4 years (10% payable 2022 and 30% payable in
2023 and 2024). The payment is secured by a guarantee letter through a chattel mortgage of 20% of CBE shares and 100% of SAE shares. The outstanding
amount is updated by CDI. During the year ended December 31, 2021, the Company recognized R$33,969 of interest.
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(f) The amount represents 20% of the acquisition price and was retained for any eventual inaccuracies in the fulfillment of the guarantees given in the
purchase and sale agreement. The amount was updated considering 100% of the Interbank certificates of deposit (CDI) calculated from the date of
acquisition until the payment date, which occurred on December 31, 2021.
(g) The obligation is recognized at present value of the acquisition price using an estimated interest rate of 8,2% for the last installment due in September
2022.
(h) This amount is related to the acquisition of the remaining 40% interest in EI and will be paid in May 2023 subject to price adjustments. This amount is
recorded at the present value using an estimated interest rate of 13.4% (13.1% in 2020).
On May 14, 2021, the Company concluded the first stage of the Escola da Inteligência acquisition with the payment of R$ 88,000, which added to the
R$200,000 paid in December 2020, relates to the 60% of interest in the acquired business.
The last installment is payable on May 31, 2023, for 6 times EI’s ACV book value for 2023 plus cash generation and multiplied for 40%.
During the year ended December 31, 2021, the Company recognized R$31,215 of interest and the accounts payable decreased by R$3,473.
(i) 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 13.7% (13.1% in 2020).The exercise price will be calculated for two different contents ("Geekie
One” and "Geekie Others”) and is determined by the greater of:
Geekie One: 8 times Geekie’s ACV book value for 2022 less net debt, multiplied by the remaining interest of sellers; or 0.65 times the multiple of the
Company’s ACV book value for 2022, multiplied by Geekie’s ACV for 2022, less net debt, multiplied by the remaining interest of sellers. The amount is due
on June 1, 2022.
Geekie Others: 8 times Geekie’s revenue for 2022 multiplied by the remaining interest of sellers; or 0.65 times the multiple of the Company’s ACV book
value for 2022, multiplied by Geekie’s revenue for 2022, multiplied by the remaining interest of sellers. The amount is due on January 6, 2023.
During the year ended December 31, 2021, the Company recognized R$27,023 of interest and the accounts payable increased by R$80,744, mainly due to
increase in expected ACV book value of Geekie One product for 2022, net of the variation of the net debt.
(j) The liability is composed of the present value of the balance payable for the remaining 40% interest in Me Salva!, plus the retained amount defined in the
contract. The balance is recognized at present value, using a discount rate of 13.7%. The payment of the retained portion is in the amount of R$ 1,324 and
will be made in 5 equal annual installments, commencing in June 2022. The payment of the second stage will be made in 2025 and the acquisition price of
40% is calculated based on the estimated 2024 revenue multiplied by 3, less net debt. During year ended December 31, 2021, the Company recognized an
interest expense of R$ 2,227 and the accounts payable decreased by R$ 3,867.
(k) The liability is composed of the present value of the balance payable for the outstanding installments for settlement of the 100% participation acquired
from Eduqo, plus the price adjustments and earn out amount defined in the contract. The balance is recognized at present value, using a discount rate of
14.3%. Payment of the outstanding installments in the amount of R$ 13,473 and the earn out of R$2,603 will be made in 2 equal annual installments,
commencing in July 2022. The price adjustment of R$ 797 will be paid in a single installment in July 2022. During the year ended December 31, 2021, the
Company recognized an interest expense of R$ 1,159 and the accounts payable increased by R$ 114.
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(l) The liability is composed of the present value of the balance payable for the outstanding installments for settlement of the 100% participation acquired
from Edupass, plus the earn out amount defined in the contract. The balance is recognized at present value, using a discount rate of 15.3%. The payment
of the outstanding installments is in the amount of R$ 1,975 and will be made in 2 equal annual installments, commencing in September 2022, while the
payment of the earn out will be made in 2024, in the amount of R$ 11,254. The earn out is calculated based on the estimated 2023 revenue.
18 Labor and social obligations
Bonuses (a)
Payroll and social charges
Payroll accruals
Other labor
Current
Non-current
(a) Variable remuneration (bonuses)
2021
30,789
96,343
24,225
6,905
158,262
157,601
661
2020
31,046
53,462
25,582
11,549
121,639
85,069
36,570
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$24,184, R$18,989 and R$14,519 for the years ended December 31, 2021, 2020, and 2019, respectively.
(b) Share-based compensation plan
Geekie Plan
Geekie has its own stock option plan that is granted to employees elected by Management and duly approved by the Board.
The first stock option plan was approved on December 19, 2017, with share-based compensation features to be settled in cash and not in equity. On
November 27, 2020, the entity reassessed the fair value of the vested shares in the closing period and updated the liability against share-based compensation
plan expenses, reducing the net assets acquired of the Geekie’s opening balance.
On December 1, 2020, after Geekie’s acquisition by Arco, the Company approved, new conditions for granting stock options in the total amount of 31,763
shares. The stock options are exercisable from the date of approval of the new grant agreement, with the vesting period on that date being considered fulfilled.
The new stock options plan is classified as cash settled since all Geekie’s employees have signed a mandatory contract to sell all the options to Arco at
exercise date at the same price to be paid to non-controlling selling shareholders and liability is measured at fair value at the end of each reporting period until
its effective settlement.
The exercise price of the options granted to all beneficiaries is R$ 82.91 as determined in the grant agreements. The beneficiary has the maximum period for
exercising the options is up to March 31, 2022, under penalty of forfeiture.
The fair value of the plan is calculated using the same valuation method as the accounts payable to selling shareholders for the acquisition of the remaining
interest. This payable amount was reclassified to current liabilities in 2021, since its due to 2022.
Although the valuation used in both calculations is the same, Arco recorded accounts payable to selling shareholders, and Geekie recorded stock options for
employees who remained in the company after the acquisition without the possibility of liquidation in equity as labor and social obligations.
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Restricted stock units
In 2019, the Company implemented a new share-based payment program called restricted stock units ("RSU”) of the holding company Arco Platform Limited
for employees of the Company’s subsidiaries and members of the Board of Directors, which will be available for sale by the beneficiaries annually, on their
anniversary dates, except for the members of the Board, whose shares are restricted for sale for one year after vesting.
The participant’s right to effectively receive ownership of the restricted shares will be conditioned on the participant’s continuance and performance as an
employee, director, or director of any company in the business group from the grant date until vesting. If a participant leaves the group or does not achieve
the proposed performance goal, the participant will be entitled to receive his or her vested shares and a pro rata amount of the granted and unvested shares,
by reference to the vesting period in which the termination occurred and based on the number of days the participant was employed by us. The total amount
will be calculated based on the proposed goal multiplied by a rate between 80% and 120%. After the vesting period, the restricted shares have the same rights
and privileges as any shareholder.
The following table reflects the movements of outstanding shares from the grant date until December 31, 2021:
Outstanding at December 31, 2020
Granted (a)
Vested (b)
Restricted stocks units transferred
Effectively forfeited
Outstanding at December 31, 2021
Number of
restricted
stock units
161,231
251,555
(177,331)
(92,561)
(710)
142,184
(a) These shares granted are adjusted accordingly to a performance program, which can increase or reduce the number of shares that will be transferred after
the vesting period.
(b) Refers to the total number of shares whose vesting period was fulfilled as defined in the contract (anniversary date), but not yet transferred to the
beneficiaries on December 31, 2021. Restricted Shares will be transferred to the participant only after the vesting period has been completed or in the
event of contractual termination.
The total compensation expense for the year ended December 31, 2021, including taxes and social charges, was R$51,231, (R$33,160 of principal and R$18,071
of taxes and contributions) net of estimated forfeitures. These awards are classified as equity settled.
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The fair value of these equity instruments was measured on the grant date as follows:
Grant date (a)
30/04/2019
30/06/2019
30/06/2019
15/10/2019
23/01/2020
02/03/2020
04/03/2020
03/09/2020
19/11/2020
19/11/2020
10/02/2021
10/02/2021
23/02/2021
26/02/2021
15/04/2021
01/06/2021
24/06/2021
30/09/2021
30/09/2021
30/09/2021
30/09/2021
30/09/2021
30/09/2021
30/09/2021
Total
Final
vesting
date
28/09/2021
30/06/2020
30/06/2020
28/09/2021
28/09/2022
28/09/2022
28/09/2021
28/09/2022
30/06/2022
30/06/2021
31/03/2023
31/03/2024
30/06/2022
31/03/2024
30/06/2022
31/03/2024
31/12/2021
31/03/2024
28/09/2023
31/03/2024
31/03/2025
31/12/2021
30/06/2022
30/09/2021
Vesting period (% per year)
3 years (33.33%)
1 year (100%)
1 year (100%)
3 years (33.33%)
3 years (33.33%)
3 years (33.33%)
3 years (33.33%)
3 years (33.33%)
1 year (100%)
1 year (100%)
3 years (33.33%)
4 years (20%, 20%, 30%, 30%)
1 year (100%)
4 years (20%, 20%, 30%, 30%)
1 year (100%)
4 years (20%, 20%, 30%, 30%)
1 year (100%)
4 years (20%, 20%, 30%, 30%)
3 years (33.33%)
4 years (20%, 20%, 30%, 30%)
4 years (20%, 20%, 30%, 30%)
1 year (100%)
1 year (100%)
1 year (100%)
Total shares
granted
542,760
1,543
1,543
37,929
13,000
36,673
13,164
3,600
3,562
3,086
8,400
50,200
1,838
9,366
1,836
475
89,808
5,000
3,000
4,000
75,000
3,107
1,543
167
910,600
Total shares
cancelled
(76,277)
—
—
(7,683)
—
(1,442)
—
(1,687)
(984)
—
—
(1,145)
—
—
—
(74)
(548)
—
—
—
—
—
—
—
(89,840)
Total shares
vested (b)
Total shares
outstanding
Average fair value at
grant date
Unit
value
average
(466,483)
(1,543)
(1,543)
(30,245)
(9,783)
(26,774)
(13,164)
(1,913)
(2,030)
(3,086)
(5,126)
(17,360)
(1,162)
(3,069)
(1,082)
(140)
(89,530)
(1,246)
(1,251)
(997)
(6,796)
(3,031)
(520)
(167)
(688,041)
—
—
—
—
3,910
10,279
—
—
1,781
—
5,275
35,738
1,838
5,728
1,836
276
—
3,522
1,761
2,817
66,031
—
1,392
—
142,184
68,800
319
274
7,593
2,788
8,762
3,346
883
772
669
1,723
10,296
366
1,841
291
70
14,837
590
354
472
8,852
367
182
20
134,467
126.76
206.66
177.71
200.18
214.48
238.93
254.21
245.18
216.63
216.63
205.11
205.11
198.87
196.58
158.28
148.28
165.21
118.02
118.02
118.02
118.02
118.02
118.02
118.02
(a) 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.
(b) Includes the number of Restricted Shares pro rata in relation to the vesting period not yet fulfilled, based on the number of days the participant worked
for the Company during such vesting period until the closing of these financial statements, whose Restricted Shares will be transferred to the participant
only after the vesting period has been completed or in the event of contractual termination.
Matching program
On February 26, 2021, the Company’s Restricted Shares Plan Advisory Committee approved the Company’s first Matching Program, pursuant to which the
Company will match the number of Class A shares (at no additional cost to the participant) that were acquired by the participant at fair market value
("investment shares”), using the amounts received by the participant as a short term incentive and designated by the Company’s board of directors to be
used as an investment in investment shares, provided certain vesting conditions are satisfied.
Under the matching shares program, participants are required to (i) be employed or providing services to the Company through each vesting date, as set forth
in the applicable award agreement and (ii) hold the investment shares through each vesting date. The vesting period may not exceed five years. In addition,
upon each vesting date, a portion of the investment shares will become free of restrictions and the participant will be allowed to freely sell such shares.
All Class A shares, including the investment shares acquired by the participants of the Matching Program, vest over four years, on March 31 of each year.
As of December 31, 2021, the Company transferred 9,841 investment shares under the Matching Program with an average price of R$ 192.2.
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19 Equity
a. Share capital
As of December 31, 2021, Arco’s share capital is represented by 56,851,399 common shares of par value of US$ 0.00005 each, comprised of 27,400,848 Class B
common shares and 29,450,551 Class A common shares.
December 31, 2020 shares outstanding
Restricted Stock Units Transferred (Note 18.b)
Restricted Stock Unit withheld (a)
Cancellation of shares repurchased
December 31, 2021 shares outstanding
57,587,563
17,878
(4,042)
(750,000)
56,851,399
(a) A portion of the shares was withheld to pay income taxes of the beneficiaries.
The Class B common shares are entitled to 10 votes per share and the Class A common shares, which are publicly traded, are entitled to 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.
b. Treasury shares
Repurchase program
On January 6, 2021, the Company’s Board of Directors approved a share repurchase program, or the Repurchase Program, to comply with management long-
term incentive plan obligations. Pursuant to the Repurchase Program, the Company may repurchase up to 500,000 of our outstanding Class A common shares
in the open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on January 6, 2021, continuing until the
earlier of the completion of the repurchase or January 6, 2023, depending upon market conditions.
On March 31, 2021, the Company approved to increase the share repurchase limit of its existing share repurchase program established on January 6, 2021.
Pursuant to the increased repurchase limit, Arco may repurchase up to 2,500,000 million of its outstanding Class A common shares in the open market, based
on prevailing market prices, or in privately negotiated transactions, over a period beginning on March 31, 2021, continuing until the earlier of the completion of
the repurchase or January 6, 2023, depending upon market conditions.
The following table reflects the movements of treasury shares repurchased until December 31, 2021:
As at December 31, 2020
Repurchase
Transferred – RSU’s program
Cancelled
As at December 31, 2021
As of December 31, 2021, the Company has a total of 605,316 of treasury Class A common shares with an average price of US$ 22.4.
F-64
Number of
restricted
stock units
—
1,480,061
(124,745)
(750,000)
605,316
Table of Contents
20 Earnings (loss) per share (EPS)
Basic
Basic EPS is calculated by dividing profit (loss) attributable to the equity holders of the parent by the weighted average number of Class A and Class B
common shares outstanding during the period.
Diluted
Diluted EPS is calculated by dividing profit (loss) attributable to the equity holders of the parent by the weighted average number of Class A and Class B
common shares outstanding during the period plus the weighted average number of common shares that would be issued on conversion of all potential
common shares with dilutive effects.
The following table reflects the profit (loss) attributable to equity holders of the parent and the share data used in the basic and diluted EPS computations:
(Loss) profit attributable to equity holders of the parent
Weighted average number of common shares outstanding
(thousand)
Effects of dilution from:
Share-based compensation plan (thousands)
2021
2020
2019
Class A Class B Total
Class A Class B Total
Class A Class B Total
(70,929) (87,154)
(158,083)
8,534
8,246 16,780
(4,379)
(5,052)
(9,431)
22,300 27,401
49,701 28,357 27,401 55,758 23,938 27,614 51,552
142
—
161
—
337
—
Basic (loss) earnings per share - R$
Diluted (loss) earnings per share - R$
(3.18)
(3.18)
(3.18)
(3.18)
0.30
0.30
0.30
0.30
(0.18)
(0.18)
(0.18)
(0.18)
Diluted profit (loss) per share is calculated by the weighted average number of outstanding shares, in order to assume the conversion of all potential dilutive
shares. Diluted earnings per share is calculated considering the instruments that may have a potential dilutive effect in the future, such as share-based
payment instruments, using the treasury shares method when the effect is dilutive.
21 Revenue
The Company’s net revenue is as follows:
Educational content
Other
Deductions:
Taxes
Net revenue
2021
1,218,687
17,237
2020
998,373
4,534
(3,850)
1,232,074
(1,197)
1,001,710
2019
570,292
2,820
(275)
572,837
Segments
Type of goods or service
Educational content
Other
Total net revenue from
Core
2021
Supplemental
Total
Core
2020
Supplemental
Total
Core
2019
Supplemental
Total
931,187
4,812
283,650
12,425
1,214,837
17,237
839,383
1,762
157,793
2,772
997,176
4,534
433,326
46
136,853
2,612
570,179
2,658
contracts with
customers
935,999
296,075
1,232,074
841,145
160,565
1,001,710
433,372
139,465
572,837
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Table of Contents
The Company recognized impairment losses on trade receivables arising from contracts with customers, included under selling expenses in the statement of
income (loss) of R$ 26,610, R$ 34,684 and R$ 17,392 for the years ended December 31, 2021, 2020 and 2019, respectively.
Revenue Indirect tax benefits
According to Brazilian tax laws, the Company is subject to the taxation, with a zero tax rate, of the social integration program tax (Programa de Integração
Social, or PIS) and the social contribution on revenues tax (Contribuição para o Financiamento da Seguridade Social, or COFINS) on the sale of books.
The sale of printed and digital books is also exempt from the Brazilian municipal taxes and from the Brazilian value added tax (Imposto sobre Operações
relativas à Circulação de Mercadorias e sobre Prestações de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação, or ICMS).
22 Expenses by nature
Educational content material
Operations personnel
Inventory reserves
Freight
Depreciation and amortization
Other
Cost of sales
Sales personnel
Depreciation and amortization
Sales & marketing
Customer support
Allowance for doubtful accounts
Real estate rentals
Other
Selling expenses
Corporate personnel
Third party services
Real estate rents
Travel expenses
Tax expenses
Software licenses
Share-based compensation plan
Depreciation and amortization
Other
General and administrative expenses
Total
2021
(118,812)
(39,358)
(26,778)
(24,831)
(55,873)
(28,755)
(294,407)
(210,055)
(99,459)
(46,795)
(89,200)
(26,610)
(820)
(23,359)
(496,298)
(96,626)
(78,530)
(1,802)
(1,541)
(7,324)
(7,411)
(88,198)
(39,553)
(7,658)
(328,643)
2020
(122,401)
(24,731)
(7,453)
(16,452)
(35,007)
(15,086)
(221,130)
(167,300)
(77,343)
(24,104)
(53,893)
(34,684)
(965)
(13,980)
(372,269)
(74,437)
(80,254)
(1,623)
(2,233)
(7,341)
(5,909)
(69,846)
(15,105)
(13,810)
(270,558)
2019
(61,953)
(12,500)
(8,476)
(14,569)
(15,311)
(4,449)
(117,258)
(87,352)
(23,573)
(31,208)
(30,755)
(17,392)
(1,728)
(7,772)
(199,780)
(53,443)
(43,415)
(2,613)
(3,439)
(2,331)
(1,487)
(66,978)
(9,430)
(8,302)
(191,438)
(1,119,348)
(863,957)
(508,476)
The increase in expenses for the year ended December 31, 2021, compared to the previous year, is mainly due to inclusion of the companies as mentioned in
Note 4.
In addition, during the year ended December 31, 2021, the companies acquired last year contributed with R$ 39,172 (2020: R$ 8,004) of cost of sales and with R$
114,343 (2020: R$ 27,135) of expenses. In the same period, the companies acquired in 2021 contributed with R$ 20,945 of cost of sales and with R$ 22,258 of
expenses.
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23 Finance result
Income from financial investments
Changes in fair value of financial investments (a)
Changes in fair value of financial derivatives (b)
Foreign exchange gains
Changes in accounts payable to selling shareholders (Note 17)
Interest income
Other
Finance income
Changes in fair value of financial derivatives (b)
Changes in accounts payable to selling shareholders (Note 17)
Interest in acquisition of investments (c)
Bank fees
Foreign exchange loss
Interest in lease liabilities
Interest on loans and financing
Other
Finance costs
Finance result
(a) Refers to gains on financial investments measured at FVPL.
2021
2020
2019
43,845
13
1,699
20,551
18,357
4,656
2,091
91,212
(38,990)
(106,177)
(121,611)
(8,647)
(22,323)
(4,795)
(57,245)
(12,298)
(372,086)
(280,874)
2,263
17,111
16,147
1,930
—
4,721
3,039
45,211
(15,585)
(20,330)
(68,379)
(4,937)
(1,742)
(3,036)
(19,862)
(8,142)
(142,013)
(96,802)
18,443
28,886
18,599
1,745
—
1,042
3,332
72,047
(18,126)
(89,403)
(42,206)
(2,990)
(2,300)
(1,489)
(1,002)
(13,339)
(170,855)
(98,808)
(b) Amount related to changes in the fair value of the put and call options from business acquisitions and investments in associates and joint ventures, put
option to convert senior notes and change in the fair value of swap derivatives. See Note 26 for further information.
(c) Refer to interest expense on liabilities related to business combinations and investments in associates.
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24 Income taxes
(a) Reconciliation of income taxes expense
(Loss) profit before income taxes
Combined statutory income taxes rate - % (a)
Expected income tax benefit (expense) at statutory rates
Reconciliation adjustments:
Share of profit (loss) of equity-accounted investees (b)
Effect of presumed profit of subsidiaries (c)
Permanent differences (d)
Stock option (e)
Other additions (exclusions), net
Current
Deferred
Income taxes benefit (expense)
Effective rate
2021
(173,657)
34 %
59,043
2020
39,102
34 %
(13,295)
2019
(42,534)
34 %
14,462
(7,542)
3,266
(22,648)
(12,569)
(3,976)
15,574
(65,609)
81,183
15,574
139
9,552
(7,427)
(6,986)
(4,305)
(22,322)
(87,379)
65,057
(22,322)
(612)
18,593
(1,714)
—
2,374
33,103
(46,850)
79,953
33,103
9.0 %
57.1 %
77.8 %
(a) Considering that Arco Platform Ltd. is domiciled in Cayman and there is no income tax in that jurisdiction, the combined tax rate of 34% demonstrated
above is the current rate applied to Arco Brasil S.A. which is the holding company of all operating entities of Arco Platform, in Brazil.
(b) Refers to the effect of 34% on the share of profit (loss) of investees for the year.
(c) Brazilian tax law establishes that companies that generate gross revenues of up to R$78,000 in the prior fiscal year may calculate income taxes as
a percentage of gross revenue, using the presumed profit income tax regime. The Company’s subsidiaries adopted this tax regime and the effect of the
presumed profit of subsidiaries represents the difference between the taxation based on this method and the amount that would be due based on the
statutory rate applied to the taxable profit of the subsidiaries.
(d) Permanent differences of non-deductible expenses.
(e) Related to the effect of 34% of Geekie’s share-based compensation plan expenses.
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(b) Deferred income taxes
The changes in the deferred tax assets and liabilities are as follows:
Deferred tax assets
Tax losses carryforward
Temporary differences
Financial instruments from acquisition of interests
Other temporary differences
Share base compensation
Tax benefit from tax deductible goodwill
Amortization of intangible assets
Total deferred tax assets
Deferred tax liabilities
Financial instruments from acquisition of interests
Tax benefit from tax deductible goodwill
Other temporary differences
Total deferred tax liabilities
Deferred tax assets (liabilities), net
Deferred tax assets
Deferred tax liabilities
Profit
or loss
Business
combination
2020
2019
Profit
or loss
Business
combination
2021
16,283
48,481
—
64,764
39,565
—
104,329
106,729
29,325
7,960
14,888
6,673
181,858
(23,873)
—
(1,237)
(25,110)
156,748
156,748
—
10,664
2,392
(1,487)
(3,341)
10,148
66,857
14,642
(15,678)
(764)
(1,800)
65,057
—
15,098
—
—
—
15,098
—
—
—
—
15,098
57,198
14,917
3,904
(3,515)
5,340
117,409
—
(38,219)
1,993
(36,226)
81,183
117,393
46,815
6,473
11,547
16,821
263,813
(9,231)
(15,678)
(2,001)
(26,910)
236,903
236,903
—
—
3,137
—
—
—
3,137
—
—
—
—
3,137
174,591
64,869
10,377
8,032
22,161
384,359
(9,231)
(53,897)
(8)
(63,136)
321,223
321,223
—
As of December 31, 2021, the Company had unrecognized deferred income tax assets in the amount of R$ 4,387 (2020: R$ 1,489) with respect to tax loss
carryforward. The net operating losses carried forward do not expire, however, their compensation is limited to 30% of the annual taxable income. The
recognition of the deferred income tax assets is supported by the Company’s forecasts of the future profitability and historical results.
25 Segment information
Segment information is presented consistently with the internal reports provided to the Company’s main key executives and chief operating decision makers.
They are responsible for allocating resources, assessing the performance of the operating segments, and making the Company’s strategic decisions.
The Executive Officers have defined the operating segments based on the reports used to make structured strategic decisions, which allow for decision-
making based on these structures:
(i) Core: The Core Curriculum business segment provides solutions that address the Brazilian K-12 curriculum requirements through a personalized and
interactive learning experience. Students access content in various formats, such as digital, video, print, and other audiovisual formats that are
aligned with the daily curriculum of their classes;
(ii) Supplemental: The Supplemental Solutions business segment provide additional value-added content that private schools can opt, in addition to the
Core Curriculum solution. Currently, the Company’s primary Supplemental product is an English as a second language (ESL) bilingual teaching
program. Technological solutions for communication with the students’ parents, learning laboratories that use the methodology of maker culture, a
platform of questions to students and teachers, a Learning Management System (LMS) platform, an educational as a benefit platform and content to
develop socio emotional skills are also offered.
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The Executive Officers do not make strategic decisions or evaluate performance based on geographic regions. Also, based on the agreements signed with
private schools as of December 31, 2021, none of the customers individually represented more than 5% of total revenue.
Net revenue
Cost of sales
Gross profit
Selling expenses
Segment profit
General and administrative expenses
Other income (expenses), net
Operating profit
Finance income
Finance costs
Share of loss of equity-accounted investees
Loss before income taxes
Income taxes benefit
Net loss for the year
Other disclosures
Depreciation and amortization
Investments in associates and joint ventures
Capital expenditures
Net revenue
Cost of sales
Gross profit
Selling expenses
Segment profit
General and administrative expenses
Other income (expenses), net
Operating profit
Finance income
Finance costs
Share of loss of equity-accounted investees
Profit before income taxes
Income taxes expense
Net profit for the year
Other disclosures
Depreciation and amortization
Investments in associates and joint ventures
Capital expenditures
2021
Supplemental
Core
935,999
(228,474)
707,525
(396,369)
311,156
296,075
(65,933)
230,142
(99,929)
130,213
—
—
—
—
—
—
—
—
—
160,565
(30,237)
130,328
(62,453)
67,875
—
—
—
—
—
—
—
—
—
Total
1,232,074
(294,407)
937,667
(496,298)
441,369
(328,643)
16,673
129,399
91,212
(372,086)
(22,182)
(173,657)
15,574
(158,083)
Total
1,001,710
(221,130)
780,580
(372,269)
408,311
(270,558)
(2,258)
135,495
45,211
(142,013)
409
39,102
(22,322)
16,780
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Core
841,145
(190,893)
650,252
(309,816)
340,436
177,564
126,873
186,846
17,321
—
24,550
194,885
126,873
211,396
2020
Supplemental
118,416
9,654
95,672
9,039
—
11,977
127,455
9,654
107,649
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Net revenue
Cost of sales
Gross profit
Selling expenses
General and administrative expenses
Other income (expenses), net
Operating profit
Finance income
Finance costs
Share of loss of equity-accounted investees
Loss before income taxes
Income taxes benefit
Net loss for the year
Other disclosures
Depreciation and amortization
Investments in associates and joint ventures
Capital expenditures
Core
433,372
(97,513)
335,859
—
—
—
—
—
—
—
—
—
—
2019
Supplemental
139,465
(19,745)
119,720
—
—
—
—
—
—
—
—
—
—
Total
572,837
(117,258)
455,579
(199,780)
(191,438)
(6,287)
58,074
72,047
(170,855)
(1,800)
(42,534)
33,103
(9,431)
43,854
48,574
45,851
4,460
—
8,242
48,314
48,574
54,093
Capital expenditures consist of additions of property and equipment and intangible assets. There were no inter-segment revenues in the years ended
December 31, 2021, 2020 and 2019.
Segment performance is evaluated based on segment profit and is measured consistently with profit or loss in the consolidated financial statements. General
and administrative expenses, other income (expenses), net, finance result, share of profit (loss) of equity-accounted investees and income taxes are managed
on a Company basis and are not allocated to operating segments.
Segment profit or loss excludes general and administrative expenses, other income (expenses), net, finance result, share of profit (loss) of equity-accounted
investees and income taxes to demonstrate the results without the influence of shared service center expenses or significant items of income and expenses
which may have an impact on quality of earnings such as restructuring costs, legal expenses, and impairments.
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.
As of December 31, 2021
Total assets
Total liabilities
As of December 31, 2020
Total assets
Total liabilities
Core
Supplemental
Total
reportable
segments
Adjustments
and
eliminations
Total
5,637,667
4,048,511
378,520
92,442
6,016,187
4,140,953
(26,068)
(26,068)
5,990,119
4,114,885
4,342,905
2,316,545
253,480
78,956
4,596,385
2,395,501
(20,105)
(20,105)
4,576,280
2,375,396
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26 Financial instruments
The Company holds the following financial instruments:
Financial assets
December 31, 2021
Cash and cash equivalents
Financial investments
Trade receivables
Derivative financial assets
Related parties
Investments and interests in other entities
Other assets (Instituto Arco)
December 31, 2020
Cash and cash equivalents
Financial investments
Trade receivables
Related parties
Other assets
Financial liabilities
December 31, 2021
Trade payables
Derivative financial liabilities
Accounts payable to selling shareholders (a)
Leases liabilities
Loans and financing
December 31, 2020
Trade payables
Accounts payable to selling shareholders (a)
Leases liabilities
Loans and financing
Assets at FVPL Assets at amortized cost
Total
—
—
—
861
—
9,803
—
10,664
211,143
1,014,056
593,263
—
11,390
—
1,373
1,831,225
211,143
1,014,056
593,263
861
11,390
9,803
1,373
1,841,889
Assets at FVPL Assets at amortized cost
Total
—
17,645
—
—
9,654
27,299
424,410
705,349
415,282
20,478
—
1,565,519
424,410
722,994
415,282
20,478
9,654
1,592,818
Liabilities at
Liabilities at FVPL amortized cost
Total
—
223,561
867,264
—
—
1,090,825
—
861,385
—
—
861,385
103,292
—
801,522
43,118
1,831,327
2,779,259
40,925
925,130
35,220
311,119
1,312,394
103,292
223,561
1,668,786
43,118
1,831,327
3,870,084
40,925
1,786,515
35,220
311,119
2,173,779
(a) The Company measures at fair value through profit or loss the contingent consideration arising from business combinations in accordance with IFRS 3.
The Company’s exposure to certain risks associated with the financial instruments is discussed in Note 27.
The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above.
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(a) Financial instruments at fair value through profit or loss
Financial investments
Until December 31, 2020, the Company designated part of its financial investments as financial assets at fair value through profit or loss, related to investment
fund which investments were entered to achieve 82.9% of the CDI. The Company designated these investments at fair value through profit or loss, given the
swaps exist solely for the counterparty to deliver a fixed return on CDI. This investment was settled in 2021 and no other financial investment was recognized
at fair value through profit or loss. See Note 6 for more details on the financial investments.
Derivative assets and liabilities
The Company maintains put options from investments and swap derivatives to protect its exposure to foreign currency risk, specifically for loans contracts.
These derivatives are measured at fair value and are presented as financial assets when the fair value results in a gain, and as financial liabilities when the fair
value results in a loss. Any gains or losses from these derivatives are recognized directly in the income statement.
As of and for the years ended December 31, 2021, 2020 and 2019 none of the Company’s derivatives has been designated as hedges for accounting purposes.
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 (expenses) in profit or loss (gain of 861, gain
of R$562 and gain of R$ 473 for the years ended in December 31, 2021, 2020 and 2019, respectively).
(b) Recognized fair value measurements
(i) Fair value hierarchy
The table below explains the judgements and estimates made in determining the fair values of the financial instruments that are recognized and measured at
fair value through profit or loss in the consolidated financial statements. To provide an indication about the reliability of the inputs used in determining fair
value, the Company has classified its financial instruments into the three levels.
Assets and liabilities are measured and recognized at fair value as follows:
Financial assets
Financial investments
Derivative financial assets
Investments at fair value
Financial liabilities
Derivative financial iliabilities
Accounts payable to selling shareholders
Hierarchy
2021
2020
Level 2
Level 2
Level 1
Level 3
Level 3
—
861
9,803
17,645
—
9,654
223,561
867,264
—
861,385
As of December 31, 2021, and 2020, the Company assessed the fair values of its financial instruments. This assessment does not indicate fair values
significantly different from the carrying amounts. The estimated realizable values of financial assets and liabilities were determined based on available market
information and appropriate valuation methodologies.
The Company’s policy is to recognize transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period.
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There were no transfers between levels for recurring fair value measurements during the financial statements’ periods presented herein.
(ii) Valuation techniques used to determine fair values
Specific valuation techniques used to value financial instruments include:
● the use of quoted market prices or dealer quotes for similar instruments;
● the fair value of derivatives is calculated with Black & Scholes; and
● the fair value of the remaining financial instruments is determined using discounted cash flow analysis.
All 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.
If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is
categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.
(iii) Fair value measurements using significant unobservable inputs (level 3)
The following table presents the changes in level 3 items for the years ended December 31, 2021, 2020 and 2019
Recurring fair value measurements
Balance as of December 31, 2018
Acquisition of Nave à Vela
Payment of acquisition of Nave à Vela
Changes in accounts payable to selling shareholders
Interest expense
Deferred revenue in Escola de Aplicação São José dos Campos Ltda.
Fair value held in step acquisitions
Gains (loss) recognized in statement of income
Balance as of December 31, 2019
Acquisitions
Payment
Changes in accounts payable to selling shareholders
Interest expense
Gains (loss) recognized in statement of income
Balance as of December 31, 2020
Acquisitions
Derivative liabilities
Payment
Changes in accounts payable to selling shareholders
Changes in fair value of derivatives
Interest expense
Finalization of price allocation (Note 14.b)
Balance as of December 31, 2021
(iv) Transfers between levels 2 and 3
Assets
Financial instruments Financial instruments Accounts payable to
selling shareholders
liabilities
(174,410)
(58,194)
21,098
(89,403)
(35,127)
—
7,368
—
(328,668)
(478,209)
9,520
(20,314)
(43,714)
—
(861,385)
(33,411)
—
119,950
(87,706)
—
(71,664)
66,952
(867,264)
(25,097)
—
—
—
—
54
—
(8,897)
(33,940)
—
—
—
—
33,940
—
—
(185,409)
—
—
(38,152)
—
—
(223,561)
26,630
—
—
—
—
—
—
9,316
35,946
—
—
—
—
(35,946)
—
—
—
—
—
—
—
—
—
In the years ended December 31, 2021, 2020 and 2019, the Company did not transfer any financial instruments from level 2 into level 3.
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(v) Valuation processes
The finance department of the Company performs and reviews the valuations of items required for financial reporting purposes, including level 3 fair values.
Discussions of valuation processes and results conform with the Company’s yearly reporting periods. Also, the Company hires specialists to measure fair
value of certain financial assets and liabilities independently.
The main level 3 inputs used by the Company are derived and evaluated as follows:
● Discount rates for financial assets and financial liabilities are determined using a capital asset pricing model to calculate a pre-tax rate that reflects
current market assessments of the time value of money and the risk specific to the asset.
● Risk adjustments specific to the counterparties (including assumptions about credit default rates) are derived from observable market data of credit
risk grading.
● Earnings growth factors for unlisted equity securities are estimated based on market information for similar types of companies.
● Contingent consideration – expected cash outflows are estimated based on the terms of the business combinations and the entity’s knowledge of the
business as well as how the current economic environment is likely to impact it.
27 Risk
(a) Financial risk management
The Company monitors market, credit, and operational risks in line with the objectives in capital management and counts with the support, monitoring, and
oversight of the Board of Directors in decisions related to capital management and its alignment with the objectives and risks. The Company monitors the
effectiveness of the Company’s risk management.
The sensitivity analyses in the following sections relate to the position as of December 31, 2021.
Capital management
The Company’s objectives when managing capital are to:
● maximize shareholder value;
● safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders;
and
● maintain an optimal capital structure to reduce the cost of capital.
In order to maintain or alter the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue
new shares or sell assets to reduce debt.
No changes were made in the objectives, policies, or processes for managing capital during the years ended December 31, 2021, 2020 and 2019.
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(i) Foreign exchange risk
Exposure
The Company’s exposure to foreign currency risk as of December 31, 2021 and 2020, was as follows:
Cash and cash equivalents (Note 5)
Financial investments
Loans and financing
2021
154
—
(654,864)
2020
28,327
542
—
The Company does not operate outside Brazil and does not have exposure to foreign exchange risk on commercial transactions, i.e., revenues or expenses.
Sensitivity analysis
The sensitivity analysis as of December 31, 2021, consider three scenarios of U.S. dollar exchange rate variation, as follows:
● Base scenario - exchange rate as of December 31, 2021 of R$ 5.5799 per US$ 1.00;
● Scenario I - a 10% increase in the U.S. dollar exchange rate to R$6.1379; and
● Scenario II - a 10% decrease in the U.S. dollar exchange rate to R$5.0219.
The table below set forth the sensitivity analysis as of December 31, 2021, for cash and cash equivalents and financial investments of US$ 28 thousand and
for US$ 117,361 thousand of convertible notes, both denominated in U.S. dollar:
Finance income (costs)
(ii) Liquidity risk
Base scenario
Exchange rate: R$ 5.5799
—
Scenario I
Scenario II
Exchange rate: R$ 6.1379
Exchange rate: R$ 5.0219
R$ (65,472)
R$ 65,472
Management of the Company has responsibility for mitigating liquidity risk. In order to achieve its goals, management regularly reviews the risk and maintains
appropriate reserves, including bank credit facilities with first tier financial institutions. Management also continuously monitors projected and actual cash
flows and the combination of the maturity profiles of the financial assets and liabilities.
The main requirements for financial resources used by the Company arise from the need to make payments for printing educational content, freight expenses,
operating expenses, labor and social obligations, acquisition of interest in other entities and other operating disbursements.
The table below summarizes the maturity profile of the Company’s financial liabilities based on contractual undiscounted amounts:
December 31, 2021
Trade payables
Lease liabilities
Loans and financing
Derivative financial liabilities
Accounts payable to selling shareholders
Less
than 3
3 to 12
months months
103,292
6,018
213,214
—
379,501
702,025
—
14,104
15,234
—
420,052
449,390
1 to 2
years
—
16,972
941,568
—
540,470
1,499,010
2 to 3
years
—
4,620
19,324
—
307,836
331,780
3 to 4
years
—
1,005
—
—
20,690
21,695
4 to 5
years
—
349
—
—
237
586
More
than 5
years
—
50
641,987
223,561
—
865,598
Total
103,292
43,118
1,831,327
223,561
1,668,786
3,870,084
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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.
(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, related parties, accounts payable to selling shareholders and loans and
financing.
Sensitivity analysis
The Company has a significant portion of its financial investments indexed to the CDI variation. According to the reference rates obtained from the website of
the Brazilian Stock Exchange – B3 S.A. - Brasil, Bolsa, Balcão ("B3”) and projected for 12 months, as of December 31, 2021, the CDI rate was 12.36%.
As of December 31, 2021, the Company’s management estimated two scenarios of the CDI rates at +10% and -10%, which were used as a basis for the possible
and remote scenarios, respectively. The table below shows a summary of the scenarios estimated by Management and the effect on profit before income taxes:
December 31, 2021
Cash, bank deposits and cash equivalents
Financial investments
Accounts payable to selling shareholders
Related parties
Loans and financing
Exposure +10%
210,989
1,014,056
801,522
11,390
1,176,463
2,608
12,534
9,907
141
14,570
-10%
(2,608)
(12,534)
(9,907)
(141)
(14,570)
The Company performed evaluation of their fair value at the end of each year in order to account for any changes to it, as disclosed in Note 26. These
derivatives, which are not publicly traded, have specific conditions that do not enable the Company to present a sensitivity analysis in relation to specific
interest rates or market indexes.
Changes in liabilities arising from financing activities
Leases
Loans and financing
Total
—
—
—
20,089
—
20,089
Change in
accounting
As of
January
December 31,
2018
practice 1, 2019
Other 31, 2019
Other 31, 2020
December
December
Cash
flows
(5,259)
— 97,011
91,752
20,089
20,089
11,027
1,550
12,577
25,857
98,561
124,418
19,973
28,698
48,671
35,220
311,119
346,339
Cash
flows
(10,610)
183,860
173,250
Cash
flows
(19,023)
1,448,208
1,429,185
Other
26,921
72,000
98,921
December
31, 2021
43,118
1,831,327
1,874,445
F-77
Table of Contents
28 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.
Balance at December 31, 2019
Additions
Business combination
Reversals
Balance at December 31, 2020
Additions
Business combination
Reversals
Balance at December 31, 2021
Civil
Labor
Taxes
Total
—
564
—
(99)
465
262
—
(393)
334
122
108
—
(178)
52
720
4
(479)
297
129
137
599
(16)
849
274
—
(356)
767
251
809
599
(293)
1,366
1,256
4
(1,228)
1,398
As of December 31, 2021, the Company was party to lawsuits classified as possible losses totaling R$ 9,004 (2020: R$ 7,863), as shown below:
Civil (a)
Labor (b)
Total
2021
2020
7,032
1,972
9,004
6,367
1,496
7,863
(a) The civil proceedings relate mainly to 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, Companhia Brasileira de
Educação e Sistemas de Ensino S.A. and Arco Educação S.A. This request for arbitration purporting to assert the non-controlling shareholder’s rights related
to both the form of payment (shares) and the calculation of the purchase price under the Investment Agreement is still ongoing.
On November 29, 2021, the arbitration panel issued a partial award on the merits of the arbitration. The decision is under the ongoing review of financial and
legal advisors of the Company and its amount calculated will be further discussed in the award liquidation phase of the arbitration proceeding. However, the
arbitration panel decided that (i) Arco Platform Ltd. and Arco Educação S.A. are not subject to the terms of the Investment Agreement, therefore, shall not be
part of the arbitration proceeding; (ii) Mr. Cardinot will not be entitled to receive shares of Arco Platform; and (iii) the amount due by Companhia Brasileira de
Educação e Sistemas de Ensino S.A. shall be calculated based on the 10 times realized EBITDA for the school years of 2019 (first installment) and 2020
(second installment), both net of net debt, as determined in the investment agreement, consistent with the calculation methodology to estimate the
provisioned amount in our balance sheet as reported.
In light of the arbitration proceeding and based on IAS 37, the Company understands that the circumstances, risks and uncertainties of the arbitration must be
taken into consideration in order to reach the best estimate of the liability. Contingencies should be reevaluated at each balance sheet date and adjusted to
reflect the best current estimate.
F-78
Table of Contents
Based on the arbitration panel decision mentioned above, the Company has recorded the provision of the amount considered the amount due for the purchase
price under the Investment Agreement payable to the non-controlling shareholder. The liability is calculated based on the realized EBITDA for the school
years of 2019 (first installment) and 2020 (second installment), both, net of debts, as determined in the agreement. The school year is defined as the twelve-
month period starting in October of the previous year to September of the mentioned current year. The first and second installments will be paid in the course
of the arbitration. Based on realized numbers, the liability increased by R$ 4,683 in 2021 and was recorded as financial expense as described in Note 17.a).
During the twelve-month period ended December 31, 2021, the Company recognized R$ 23,373 of interest related to the liability.
29 Transactions not involving cash
During the years ended December 31, 2021, 2020 and 2019, the Company carried out the following non-cash activities, which are not reflected in the statement
of cash flows:
Tax benefit from tax deductible goodwill
Investing - financial derivatives
Business combinations - financial derivatives
Lease (Note 13)
Forward contract (Note 4)
Retained payments from business combination (Note 4)
Capital contribution (Note 4)
Price adjustment from business combination (Note 4)
Acquisition from business combination (Note 4)
30 Subsequent events
Acquisition of PGS and Mentes do Amanhã
2021
2020
—
—
—
22,346
51,501
1,324
10,000
(7,400)
36,172
—
—
—
14,471
406,635
14,821
—
4,620
22,857
2019
(46,314)
14,597
38,924
1,251
29,728
874,440
—
—
39,419
On February 3, 2022, Arco concluded the acquisition of following solutions from Pearson Education do Brasil Ltda.:
(i) PGS: a K-12 bilingual courseware and teaching methodology, previously known as Pearson Global School; and (ii) Mentes do Amanhã ("Mentes”): a K12
supplemental solution focused on 21st century skills (social-emotional learning, financial literacy and technology).
The purchase consideration consists of: (i) R$ 15,000 paid in February 2022; and (ii) 1,5 x net revenue from sales until March 2022, which will be settled until
April 2022.
This transaction broadens Arco’s supplemental market presence by adding high-quality solutions with pricing complementary to its portfolio. Arco believes
in the large potential for English as a Second Language and in the favorable market trends for 21st century skills. An even stronger portfolio better positions
Arco to capture this demand outside Arco’s school base.
Loan liquidation
On January 03, 2022, the Company paid in full a loan agreement through one of its subsidiaries Arco Educação, in the amount of R$ 201,883.
Shares repurchase
From January 1st, 2022, until March 31, 2022, the Company purchased an aggregate amount of 338,718 Class A common shares for a total of approximately US$
6.6 million. This repurchase was made in accordance with the Repurchase Program mentioned in Note 19.
F-79
Exhibit 12.1
CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Ari de Sá Cavalcante Neto, certify that:
1.
I have reviewed this annual report on Form 20-F of Arco Platform Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the company and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control
over financial reporting.
Date: March 31, 2022
Arco Platform Limited
By:
/s/ Ari de Sá Cavalcante Neto
Name:
Title:
Ari de Sá Cavalcante Neto
CEO
Exhibit 12.2
CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Roberto Rabello Otero, certify that:
1.
I have reviewed this annual report on Form 20-F of Arco Platform Limited;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the
statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this
report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the
financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report;
4. The company’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))
for the company and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to
ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our
supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for
external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the company’s disclosure controls and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the company’s internal control over financial reporting that occurred during the period covered by the
annual report that has materially affected, or is reasonably likely to materially affect, the company’s internal control over financial reporting.
5. The company’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to
the company’s auditors and the audit committee of the company’s board of directors (or persons performing the equivalent functions):
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably
likely to adversely affect the company’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the company’s internal control
over financial reporting.
Date: March 31, 2022
Arco Platform Limited
By:
/s/ Roberto Rabello Otero
Name: Roberto Rabello Otero
Title:
CFO
CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.1
The certification set forth below is being submitted in connection with the Annual Report on Form 20-F of Arco Platform Limited (the "Company”) for the
fiscal year ended December 31, 2021 (the "Report”), I, Ari de Sá Cavalcante Neto, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 31, 2022
Arco Platform Limited
By:
/s/ Ari de Sá Cavalcante Neto
Name: Ari de Sá Cavalcante Neto
Title:
CEO
CERTIFICATION BY THE PRINCIPAL EXECUTIVE OFFICER PURSUANT TO
18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
Exhibit 13.2
The certification set forth below is being submitted in connection with the Annual Report on Form 20-F of Arco Platform Limited (the "Company”) for the
fiscal year ended December 31, 2021 (the "Report”), I, Alexandre Nakamaru, certify pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of
the Sarbanes-Oxley Act of 2002, that, to the best of my knowledge:
1.
2.
the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Date: March 31, 2022
Arco Platform Limited
By:
/s/ Roberto Rabello Otero
Name: Roberto Rabello Otero
Title:
CFO
The table below is a complete list of the Company’s subsidiaries as of December 31, 2021:
List of Subsidiaries
Name
Principal Activities
Arco Educação S.A.
Arce Participações Ltda.
Companhia Brasileira de Educação e Sistemas de Ensino S.A.
SAE Digital S.A.
International School Serviços de Ensino, Treinamento e Editoração,
Franqueadora S.A.
EEM Licenciamento de Programas Educacionais Ltda.
NLP Soluções Educacionais Ltda.
WPensar S.A.
Geekie Desenvolvimento de Softwares S.A.
Studos Software Ltda.
Escola de Inteligência Cursos Educacionais Ltda.
Me Salva! Cursos e Consultorias S/A.
Quadrado Mágico Desenvolvimento e Licenciamento de Software S.A.
Desenvoolva – Educação, Treinamento e Consultoria Corporativa Ltda.
P2D Educação Ltda.
Holding
Holding
Educational content
Educational content
Educational content
Educational technology
Educational content
Educational technology
Educational technology
Educational content
Educational content
Educational content
Educational content
Educational content
Educational content
Exhibit 21.1
Country
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Brazil
Consent of Independent Registered Public Accounting Firm
We consent to the incorporation by reference in the Registration Statement (Form F-3 No. 333-234215) of Arco Platform Limited and in the related
Prospectus and the Registration Statement (Form S-8 No. 333-233920) pertaining to the Restricted Shares Grant Plan of Arco Platform Limited of our report
dated March 31, 2022, with respect to the consolidated financial statements of Arco Platform Limited, and the effectiveness of internal control over financial
reporting of Arco Platform Limited, included in this Annual Report (Form 20-F) for the year ended December 31, 2021.
Exhibit 23.1
/s/ ERNST & YOUNG
Auditores Independentes S.S.
Fortaleza, Brazil
March 31, 2022