As filed with the Securities and Exchange Commission on August 24, 2018.  

Registration No. 333-            

 

 UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549 

 

FORM F-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933 

 

Arco Platform Limited 

(Exact Name of Registrant as Specified in its Charter) 

 
The Cayman Islands 8200 N/A
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification Number)
  Rua Elvira Ferraz 250, Sala 716, Vila Olímpia, São Paulo - SP, 04552-040, Brazil
+55 (85) 3033-8264
 
(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)
 
  Cogency Global Inc.
10 East 40th Street, 10th Floor
New York, NY 10016
(212) 947-7200
 
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
  Copies to:  

Manuel Garciadiaz
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017

(212) 450-4000

 

 

Donald Baker
John Guzman

White & Case LLP
Avenida Brigadeiro Faria Lima, 2,277 – 4th Floor

São Paulo – SP 01452-000, Brazil

55 (11) 3147-5600

         
 

Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.

 

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.

 

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. __________

 

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.☐ __________

 

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.☐ __________

 

Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.

 

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 7(a)(2)(B) of the Securities 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.

 

 
CALCULATION OF REGISTRATION FEE
Title of Each Class of
Securities to be Registered
Proposed Maximum Aggregate Offering Price (1) Amount of
Registration Fee(2)
Class A common shares, par value US$       per share(3) US$100,000,000 US$12,450.00
(1)Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.

(2)Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.

(3)Include Class A common shares to be sold upon the exercise of the underwriters’ option to purchase additional shares. See “Underwriting.”

 

The Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall become effective on such date as the Commission, acting pursuant to such Section 8(a), may determine.

 

 
 

 

The information in this preliminary prospectus is not complete and may be changed. These securities may not be sold until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell nor does it seek an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.

  

 

SUBJECT TO COMPLETION, DATED              , 2018

 

PRELIMINARY PROSPECTUS

Class A Common Shares

 

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Arco Platform Limited 

(incorporated in the Cayman Islands)

 

This is an initial public offering of the Class A common shares, US$      par value per share, of Arco Platform Limited, or Arco. Arco is offering           Class A common shares.

 

Prior to this offering, there has been no public market for our Class A common shares. It is currently estimated that the initial public offering price per Class A common share will be between US$           and US$          . We intend to apply to list our Class A common shares on the Nasdaq Global Market under the symbol “ARCE.”

 

Following this offering, our existing shareholders 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 and General Atlantic Arco (Bermuda), L.P., or the GA Entity, will beneficially own % of our outstanding share capital, assuming no exercise of the underwriters’ option to purchase additional shares referred to below. The shares held by the Founding Shareholders are Class B common shares, which carry rights that are identical to the Class A common shares being sold in this offering, except that (i) holders of 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, (ii) Class B common shares have certain conversion rights and (iii) holders of Class B common shares are entitled to preemptive rights in the event that additional Class A common shares are issued in order to maintain their proportional ownership interest. For further information, see “Description of Share Capital.” As a result, the Founding Shareholders will control approximately      % of the voting power of our outstanding share capital following this offering, assuming no exercise of the underwriters’ option to purchase additional shares.

 

We are an “emerging growth company” under the U.S. federal securities laws as that term is used in the Jumpstart Our Business Startups Act of 2012 and will be subject to reduced public company reporting requirements. Investing in our Class A common shares involves risks. See “Risk Factors” beginning on page 21 of this prospectus.

 

  Per Class A common share Total
Initial public offering price US$ US$
Underwriting discounts and commissions US$ US$
Proceeds, before expenses, to us (1) US$ US$
 
(1)See “Underwriting” for a description of all compensation payable to the underwriters.

 

We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase up to            additional Class A common shares to cover the underwriters’ option to purchase additional shares, if any, at the initial public offering price, less underwriting discounts and commissions.

 

Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

The underwriters expect to deliver the Class A common shares against payment in New York, New York on or about                    , 2018.

 

Global Coordinators

 

Goldman Sachs & Co. LLC Morgan Stanley Itaú BBA BofA Merrill Lynch

 

Joint Bookrunners

 

Allen & Company LLC BTG Pactual UBS Investment Bank
 
 

 

The date of this prospectus is              , 2018.

 

 

 

 

 

 

 

 

 

 
*“CAGR” means compound annual growth rate.

 

 
 

table of contents

 

 

Page

 

Summary 1
The Offering 14
Summary Financial and Other Information 18
Risk Factors 21
Presentation of Financial and Other Information 45
Cautionary Statement Regarding Forward-Looking Statements 49
Use of Proceeds 51
Dividends and Dividend Policy 52
Capitalization 53
Dilution 54
Exchange Rates 55
Market Information 56
Selected Financial and Other Information 57
Management’s Discussion and Analysis of Financial Condition and Results of Operations 63
Industry Overview 87
Regulatory Overview 95
Business 98
Management 116
Principal Shareholders 120
Related Party Transactions 123
Description of Share Capital 125
Class A Common Shares Eligible for Future Sale 140
Taxation 142
Underwriting 146
Expenses of the Offering 156
Legal Matters 157
Experts 158
Enforceability of Civil Liabilities 160
Where You Can Find More Information 162
Explanatory Note to the Financial Statements 163
Index to Financial Statements F-1
   
 

 

We have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we may have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We and the underwriters have not authorized any other person to provide you with different or additional information. Neither we nor the underwriters are making an offer to sell the Class A common shares in any jurisdiction where the offer or sale is not permitted. This offering is being made in the United States and elsewhere solely on the basis of the information contained in this prospectus. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of the Class A common shares. Our business, financial condition, results of operations and prospects may have changed since the date on the front cover of this prospectus.

 

For investors outside the United States: Neither we, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction, other than the United States, where action for that purpose is required. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our Class A common shares and the distribution of this prospectus outside the United States and in their jurisdiction.

 

We own or have rights to trademarks, service marks and trade names that we use in connection with the operation of our business, including our corporate name, logos and website names. Other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners. Solely for convenience, some of the trademarks, service marks and trade names referred to in this prospectus are listed without the ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, service marks and trade names.

 

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Unless otherwise indicated or the context otherwise requires, all references in this prospectus 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 prospectus 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.

 

 

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Summary

 

This summary highlights information contained elsewhere in this prospectus. This summary may not contain all the information that may be important to you, and we urge you to read this entire prospectus carefully, including the “Risk Factors,” “Business” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and our consolidated financial statements and notes thereto, included elsewhere in this prospectus, before deciding to invest in our Class A common shares.

 

Overview

 

Our mission is to transform the way students learn by delivering high-quality education at scale through technology to private primary and secondary, or K-12, schools.

 

We provide a complete pedagogical system with technology-enabled features to deliver educational content to private 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, 2018 consisted of 1,140 partner schools, compared to 835 schools as of March 31, 2017, 667 schools as of March 31, 2016 and 377 schools as of March 31, 2015, representing annual growth rates of 36.5%, 25.2% and 76.9%, respectively. We had 405,814 enrolled students across all Brazilian states as of March 31, 2018, compared to 322,031 enrolled students as of March 31, 2017, 265,354 as of March 31, 2016 and 156,011 as of March 31, 2015, representing annual growth rates of 26.0%, 21.4% and 70.1%, respectively.

 

We have an asset-light, highly-scalable business model that emphasizes operational efficiency and profitability. 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 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 in 2016 and 2017 was 95.0%, which makes our recurring revenue base highly stable.

 

Our business model has allowed us to grow and achieve profitability since our founding. Our net revenue totaled R$244.4 million, R$159.3 million, and R$116.5 million in 2017, 2016 and 2015, respectively, representing annual growth rates of 53.4% and 36.7%, respectively, and R$195.1 million and R$136.1 million in the six months ended June 30, 2018 and 2017, respectively, representing a growth rate of 43.3%. We generated operating profit of R$74.9 million, R$48.6 million and R$41.6 million in 2017, 2016 and 2015, respectively, representing annual growth rates of 54.2% and 16.8%, respectively, and profit for the year of R$43.6 million, R$74.4 million and R$43.9 million in 2017, 2016 and 2015, respectively. We generated operating profit of R$75.4 million and R$54.1 million in the six months ended June 30, 2018 and 2017, respectively, representing a growth rate of 39.4% and profit for the period of R$54.3 million and R$36.2 million in the six months ended June 30, 2018 and 2017, 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 12.0% and 8.1% of our net revenue in 2017 and the six months ended June 30, 2018, respectively.

 

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 quickly and efficiently expand our footprint in Brazil since our founding. As of December 31, 2017, 183 (or 16%) of our partner schools ranked as one of the top three schools of their respective cities, according to the Brazilian National Entrance Exam (Exame Nacional do Ensino Médio), or ENEM, the principal national standardized test for university entrance in Brazil.

 

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,

 

 

 

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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 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.

 

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 education quality 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 secondary education development index (Índice de Desenvolvimento da Educação Básica), or IDEB. As of December 31, 2015, private K-12 education schools had an average education quality index score 41% 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 eight years, student enrollments in private K-12 institutions have increased 14.5%, from 6.9 million in 2010 to 7.9 million in 2017.

 

Technological innovation is driving enhancements in private K-12 education

 

In a 2018 survey conducted by Getulio Vargas Foundation (Fundação Getulio Vargas), or FGV, the number of smartphones in Brazil was expected to reach 220 million by April 2018, or approximately one smartphone device per Brazilian. Brazil is a mass adopter of disruptive technological innovations in a number of areas and it is the second largest market for Waze®, the digital traffic map application for Android® and iOS®, with São Paulo serving as its largest city in terms of number of users worldwide, according to an October 2016 article in Valor, a Brazilian financial newspaper. Brazil is also the second largest market in the world for Instagram® in terms of number of users according to a March 2018 article in VentureBeat, an online technology news source, and one the

 

 

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most popular destinations for Airbnb® with Rio de Janeiro ranking fourth behind Paris, London and New York City, according to a March 2016 article in O Globo, a Brazilian newspaper.

 

We believe that this digital transition can confer significant benefits on, and opportunities for, education service and content providers, such as:

 

·revenue diversification, as 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.

 

Importance of K-12 performance in university admissions process

 

The best higher education institutions in Brazil are public, with a highly competitive admissions process based largely on challenging standardized admissions exams. According to Oliver Wyman, a global management consulting firm, 49 out of the 60 top-ranked universities in Brazil were public as of December 31, 2016. In recent years, competition for admission into public universities has increased, a trend driven both by greater student demand and a decrease in the number of available seats. In 2012, there were on average 11 applicants per available seat in public universities, as compared to 14 applicants in 2016, according to Oliver Wyman, while the number of public university seats decreased by 6.3% from 2012 to 2016. As a result of this competition, parents are increasingly focused on schools that over-perform in the standardized university admissions tests. According to a 2017 study by the Brazilian Institute of Public Opinion and Statistics (Instituto Brasileiro de Opinião Pública e Estatística), or the IBOPE, education is the number one spending priority for Brazilian families. 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

 

The increased focus on education has led to an increase in the length of the average school day. After-school education, comprised of tutoring, language courses and robotics, among other extra-curricular 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.

 

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, after-school education represents a growing opportunity for private institutions. This is especially the case given the wide variety of supplemental solutions that can be offered to students during 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-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.

 

 

 

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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.

 

Our Market Opportunity

 

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.

 

The Arco Way

 

We believe that by combining our platform, our ability to innovate and our corporate culture, we can help create value for our partner schools and competitive advantages for our business.

 

 

Our Business Model

 

Our Business-to-Business-to-Consumer, or 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

 

 

 

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revise our contract fees annually, 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.

 

Long-term contracts, 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. Most of our average 5.0% 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. For a description of how we calculate retention rates, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Retention Rates.”

 

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. 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 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 Cohort Economics

 

We believe that an annualized cohort analysis is a useful indicator of demand for our platform. We define a cohort as the amount spent by all of our partner schools on our platform over each 12-month period. We calculate the total contractual fees payable by our partner schools in each cohort as of the end of each academic year, or the yearly contract fee amount. We have a track record of attracting new partner schools and increasing the amount of fees they pay us over time. For further information, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Our Cohort Economics.”

 

Our Solutions

 

In the education sector, we believe that quality is fundamental. Our platform 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.

 

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.

 

 

 

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Our turnkey educational platform solutions comprise core K-12 curricula, as well as supplemental instructional content currently focused on English as a second language.

 

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 are able to 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 are able to 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 are comprised of 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 in two different versions, consisting of (i) SAS Plataforma de Educação, or SAS, a premium solution focused on high-income private schools, and (ii) SAE Digital S.A., or SAE, a basic solution focused on upper-middle income private schools.

 

SAS and SAE 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.

 

·Adaptive learning: A personalized instruction and assessment tool delivered through our exam management portal to help students prepare for and take exams.

 

·Interactive learning: Augmented reality and video features throughout our materials, 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-app communication: A responsive, simple and user-friendly communication tool for partner schools, students and parents.

 

·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.

 

Our Supplemental Solutions are comprised of additional value-added content for which partner schools can opt in as an addition to our Core Curriculum. Currently, our primary Supplemental Solutions offering is an ESL bilingual program, first offered in 2015 following our acquisition of an interest in International School Serviços de Ensino, Treinamento, Editoração e Franqueadora S.A., or International School. International School provides students with an internationally-oriented education, in a multi-cultural environment, based on a curriculum like the International Baccalaureate or Cambridge International Examinations. We intend to add additional, non-core supplemental educational modules to our Supplemental Solutions over time.

 

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.

 

 

 

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·Crowdsourced education: Collaborative and versatile platform for classrooms that allows students to collaborate in project building and problem solving.

 

What Sets Us Apart

 

We believe that we have the following business strengths that allow us to disrupt the private K-12 education market:

 

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 our parents 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, 2017, 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

 

We have a dedicated team of over 214 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 200 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.

 

We also have a team of over 100 employees focused on the product design and digital presentation of our education materials on our platform.

 

Widespread positive customer satisfaction and strong academic outcomes

 

We monitor our user experience on a regular basis by measuring our Net Promoter Scores, or NPS, a widely known survey methodology used to measure overall customer satisfaction. As of December 31, 2017, we had an NPS score of 86 according to our internal analysis. Our NPS score compares to 55 for Apple iPhone as of October 26, 2017, 61 for Amazon as of October 19, 2017 and 50 for Google as of October 31, 2017, according to NPS Benchmarks.

 

Our customer satisfaction is also driven by our ability to meaningfully improve the performance of our partner schools’ enrolled students in the ENEM exam, a prerequisite for entrance into almost all higher education undergraduate institutions in Brazil. According to the 2017 results of the ENEM exam:

 

·Three of the 10 top schools in the Brazilian national school rankings use our solutions; and

 

·183 of our partner schools are ranked among the top three schools in their respective cities.

 

 

 

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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 in net revenue of 95.0% in 2016 and 2017. For a description of how we calculate retention rates, please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Key Business Metrics—Retention Rates.”

 

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 5.0% in 2017. 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.

 

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 of our stakeholders and seeking impactful next-generation solutions for private K-12 education.

 

As of December 31, 2017, the average age of our employees was 30 and 53% of our employees were women. We also 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 December 31, 2017, our up-selling potential would increase our student enrollments by 54.0%; and

 

·Cross-selling our Supplemental Solutions to currently-enrolled class years at our partner schools. As of December 31, 2017, only 3.2% of our client base used both our Core Curriculum and Supplemental Solutions.

 

Expand our partner school base

 

We estimate that the top five private education providers in Brazil accounted for less than 2% of the private education market as of December 31, 2017. We believe that our sales efforts will benefit as the performance of partners schools using our educational platform becomes more widespread and widely known.

 

 

 

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Add new Supplemental Solutions

 

We consistently review potential opportunities to provide additional after-school 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 and 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 in an effort 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 IT systems (WPensar S.A., or WPensar), supplemental instruction content (International School) and digital-native content platform (Geekie Desenvolvimento de Softwares S.A., or Geekie).

 

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 to opportunistically pursue 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 K-12 educational content through software-based platforms.

 

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 11 companies. 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. For example, our acquisition of Sistema de Ensino Integral Bahiense reinforced our presence in the State of Rio de Janeiro, our acquisition of Sistema de Ensino Energia expanded our presence in the southern region of Brazil, and our acquisition of International School enabled us to enter the ESL bilingual market.

 

Recent Developments

 

Our Corporate Reorganization

 

We are a Cayman Islands exempted company incorporated with limited liability on April 12, 2018 for purposes of effectuating our initial public offering. At the time of our incorporation, the Founding Shareholders and the GA Entity held 7,476,705 shares of Arco Educação S.A., or Arco Brazil, which are all of the shares of Arco Brazil, and Arco Brazil holds all the shares of EAS Educação S.A., or EAS Brazil, our principal operating company whose consolidated financial statements are included elsewhere in this prospectus.

 

Prior to the consummation of this offering, the Founding Shareholders and the GA Entity will contribute all of their shares in Arco Brazil to us.  In return for this contribution, we will issue 27,658,290 new Class B common shares to the Founding Shareholders and 9,725,235 new Class A common shares to the GA Entity in a one-to-five exchange for the shares of Arco Brazil contributed to us. Until the contribution of Arco Brazil shares to us, we will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments.

 

 

 

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After accounting for the new Class A common shares that will be issued and sold by us in this offering, we will have a total of           common shares issued and outstanding immediately following this offering,          of these shares will be Class B common shares beneficially owned by the Founding Shareholders, and            of these shares will be Class A common shares beneficially owned by investors purchasing in this offering.

 

The diagram below depicts our organizational structure, after giving effect to our corporate reorganization and this offering:

 

 

 
(1)Includes Class B common shares beneficially owned by our Founding Shareholders.

 

(2)Includes Class A common shares beneficially owned by the GA Entity. See “Principal Shareholders.”

 

For further information on our corporate reorganization, please see “Presentation of Financial and Other Information—Corporate Events.”

 

Payment of Dividends

 

A dividend payment of R$10.5 million (based on EAS Brazil’s net profit for the year ended December 31, 2017, and pursuant to Brazilian Law No. 6,404 dated December 15, 1976, as amended, or the Brazilian Corporate Law, which requires EAS Brazil to pay a minimum dividend equal to 25% of its net profit for the year) which was declared by the management of EAS Brazil was approved at a shareholders’ meeting of EAS Brazil held on May 30, 2018, or the EAS Shareholders’ Meeting, and paid to the shareholders of EAS Brazil on June 25, 2018. In addition, EAS Brazil approved an additional dividend of R$74.5 million on June 7, 2018, which was paid to the shareholders of EAS Brazil on June 25, 2018.

 

 

 

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Acquisition of an additional interest in the share capital of Geekie

 

On July 3, 2018, we acquired an additional 1.51% interest in the share capital of Geekie through a capital increase of US$2.0 million, increasing our total interest in the share capital of Geekie from 6.54% to 8.05%. Geekie intends to use the proceeds from the capital increase to support its working capital needs.

 

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 related to Brazil and risks related to the offering and 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.

 

Risks Relating to Our Business and Industry

 

·Our revenue derives 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, or an increase in delays and/or defaults in the payment of amounts owed to us by the partner schools may adversely affect our income and cash flow and may materially affect us.

 

·Any increase in the attrition rates of students in our partner schools may adversely affect our results of operations.

 

·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.

 

·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.

 

·Any change or review of the tax treatment applied to our activities, or the loss or reduction in tax benefits on the sale of books (including digital content) may materially adversely affect us.

 

Risks 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 and economic conditions could harm us and the price of our Class A common shares.

 

·The ongoing economic uncertainty and political instability in Brazil may harm us 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.

 

·Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our Class A common shares.

 

Risks Relating to the Offering and our Class A Common Shares

 

·Our Class A common shares have not previously been traded on any stock exchange and, therefore, an active and liquid trading market for such securities may not develop, which could potentially depress the trading price of our Class A common shares after this offering.

 

·The Founding Shareholders, our largest group of shareholders, will own 100% of our outstanding Class B common shares, which represent approximately % of the voting power of our issued share capital following

 

 

 

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the offering, and will control all matters requiring shareholder approval. This concentration of ownership and voting power limits your ability to influence corporate matters.

 

·Our dual class capital structure means our shares will not be included in certain indices. We cannot predict the impact this may have on our share price.

 

·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.

 

Corporate Information

 

Our principal executive offices are located at Rua Elvira Ferraz 250, Sala 716, Vila Olímpia, São Paulo - SP, 04552-040, Brazil. Our telephone number at this address is +55 (85) 3033-8264.

 

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 prospectus or the registration statement of which it forms a part.

 

Implications of Being an Emerging Growth Company

 

As a company with less than US$1.07 billion in revenue during our last fiscal year, we qualify as an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012, or the JOBS Act. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. These provisions include:

 

·a requirement to have only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations disclosure;

 

·an exemption from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, as amended, or the Sarbanes-Oxley Act, in the assessment of our internal control over financial reporting;

 

·reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration statements; and

 

·exemptions from the requirements of holding non-binding advisory votes on executive compensation and golden parachute arrangements.

 

We may take advantage of these provisions for up to five years or such earlier time that we are no longer an emerging growth company. We would cease to be an emerging growth company if we have more than US$1.07 billion in annual revenue, have more than US$700 million in market value of our Class A common shares held by non-affiliates or issue more than US$1.0 billion of non-convertible debt over a three-year period. We may choose to take advantage of some but not all of these reduced burdens. We have not taken advantage of any of these reduced reporting burdens in this prospectus, although we may choose to do so in future filings and if we do, the information that we provide shareholders may be different than you might get from other public companies in which you hold equity.

 

In addition, under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. Given that we currently report and expect to continue to report under IFRS as issued by the IASB, we will not be able to avail ourselves of this extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required by the IASB.

 

 

 

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The Offering

 

This summary highlights information presented in greater detail elsewhere in this prospectus. This summary is not complete and does not contain all the information you should consider before investing in our Class A common shares. You should carefully read this entire prospectus before investing in our Class A common shares including “Risk Factors” and our consolidated financial statements.

 

Issuer Arco Platform Limited
   
Class A common shares offered by us           Class A common shares (or           Class A common shares if the underwriters exercise in full their option to purchase additional shares).
   
Offering price range Between US$           and US$           per Class A common share.
   
Voting rights

The Class A common shares will be entitled to one vote per share, whereas the Class B common shares (which are not being sold in this offering) will be entitled to 10 votes per share.

 

Each Class B common share may be converted into one Class A common share at the option of the holder.

 

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, then each Class B common share will convert automatically into one Class A common share.

 

In addition, each Class B common share will convert automatically into one Class A common share upon any transfer, except for certain transfers to other holders of Class B common shares or their affiliates or to certain unrelated third parties as described under “Description of Share Capital—Conversion.”

 

Holders of Class A common shares and Class B common shares will vote together as a single class on all matters unless otherwise required by law and subject to certain exceptions set forth in our Articles of Association as described under “Description of Share Capital—Voting Rights.”

 

Upon consummation of this offering, assuming no exercise of the underwriters’ option to purchase additional shares, (1) holders of Class A common shares will hold approximately           % of the combined voting power of our outstanding common shares and approximately        % of our total equity ownership and (2) holders of Class B common shares will hold approximately          % of the combined voting power of our outstanding common shares and approximately           % of our total equity ownership. 

 

 

 

 

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If the underwriters exercise their option to purchase additional shares in full, (1) holders of Class A common shares will hold approximately           % of the combined voting power of our outstanding common shares and approximately           % of our total equity ownership and (2) holders of Class B common shares will hold approximately           % of the combined voting power of our outstanding common shares and approximately          % of our total equity ownership.

 

The rights of the holders of Class A common shares and Class B common shares are identical, except with respect to voting, conversion, and transfer restrictions applicable to the Class B common shares, and holders of Class B common shares are entitled to preemptive rights to purchase additional Class B common shares in the event that additional Class A common shares are issued, upon the same economic terms and at the same price, in order to maintain such holder’s proportional ownership interest in us. See “Description of Share Capital” for a description of the material terms of our common shares.

 

Option to purchase additional Class A common shares We have granted the underwriters the right to purchase up to an additional          Class A common shares from us within 30 days of the date of this prospectus, at the public offering price, less underwriting discounts and commissions, on the same terms as set forth in this prospectus.
   
Listing We intend to apply to list our Class A common shares on the Nasdaq Global Market, or Nasdaq, under the symbol “ARCE.”
   
Use of proceeds We estimate that the net proceeds to us from the offering will be approximately US$          . We intend to use the net proceeds from the offering to fund future acquisitions or investments in complementary businesses, products or technologies and for general corporate purposes. See “Use of Proceeds.”
   
Share capital before and after offering

As of the date of this prospectus, our authorized share capital is US$                 , consisting of 37,483,250 shares of par value US$              each. Of those authorized shares, 9,824,960 are designated as Class A common shares and 27,658,290 are designated as Class B common shares.

 

Immediately after the offering, we will have           Class A common shares outstanding, assuming no exercise of the underwriters’ option to purchase additional shares.

 

 

 

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Dividend policy 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 shareholders. We do not anticipate paying any cash dividends in the foreseeable future.
   
Lock-up agreements We have agreed with the underwriters, subject to certain exceptions, not to offer, sell, or dispose of any shares of our share capital or securities convertible into or exchangeable or exercisable for any shares of our share capital during the 180-day period following the date of this prospectus. Members of our board of directors and our executive officers, and substantially all of our equityholders, have agreed to substantially similar lock-up provisions, subject to certain exceptions.
   
Risk factors See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in our Class A common shares.
   
Cayman Islands exempted company with limited liability We are a Cayman Islands exempted company with limited liability. 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. In particular, 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 properly 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. In comparison, under the Delaware General Corporation Law, a director of a Delaware corporation

 

 

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  owes fiduciary duties to the corporation and its stockholders comprised of the duty of care and the duty of loyalty. Such duties prohibit self-dealing by a director and mandate 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 “Description of Share Capital – Principal Differences between Cayman Islands and U.S. Corporate Law”.

 

Unless otherwise indicated, all information contained in this prospectus assumes no exercise of the option granted to the underwriters to purchase up to additional           Class A common shares in connection with the offering.

 

 

 

 

 

 

 

 

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Summary Financial and Other Information

 

The following tables set forth, for the periods and as of the dates indicated, our summary financial and other data. This information should be read in conjunction with “Presentation of Financial and Other Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the notes thereto, included elsewhere in this prospectus.

 

The summary interim statements of financial position as of June 30, 2018 and the interim statements of income for the six months ended June 30, 2018 and 2017 of EAS Educação S.A., or EAS Brazil, our principal operating company and a wholly-owned subsidiary of Arco Brazil, have been derived from the unaudited interim condensed consolidated financial statements of EAS Brazil included elsewhere in this prospectus, prepared in accordance with International Financial Reporting Standard IAS No. 34 “Interim Financial Reporting”, or IAS 34. The summary statements of financial position as of December 31, 2017 and 2016 and the statements of income for the years ended December 31, 2017, 2016 and 2015 have been derived from the audited consolidated financial statements of EAS Brazil included elsewhere in this prospectus, prepared in accordance with IFRS, as issued by the IASB. The results of operations for the six months ended June 30, 2018 are not necessarily indicative of the results of operations that may be expected for the entire year ending December 31, 2018.

 

   For the Six Months Ended June 30,  For the Year Ended December 31,
   2018  2018  2017  2017  2017  2016  2015
   US$ millions(1)  R$ millions  US$ millions
(1)
  R$ millions
      (unaudited)      
Statement of Income Data                     
Net revenue    50.6    195.1    136.1    63.4    244.4    159.3    116.5 
Cost of sales    (11.1)   (42.7)   (34.4)   (15.2)   (58.5)   (41.3)   (28.0)
Gross profit    39.5    152.4    101.7    48.2    185.9    117.9    88.5 
Selling expenses    (12.6)   (48.4)   (29.1)   (17.0)   (65.3)   (40.3)   (20.3)
General and administrative expenses    (8.0)   (30.7)   (19.7)   (12.7)   (48.9)   (32.7)   (24.6)
Other income (expenses), net    0.6    2.2    1.2    0.9    3.3    3.6    (2.0)
Operating profit    19.6    75.4    54.1    19.4    74.9    48.6    41.6 
Finance income    1.9    7.3    7.9    3.2    12.5    47.2    14.4 
Finance costs    (2.0)   (7.8)   (7.9)   (5.3)   (20.4)   (1.8)   (3.1)
Finance result    (0.1)   (0.5)   (0.0)   (2.0)   (7.9)   45.4    11.3 
Share of loss of equity-accounted investees    (0.1)   (0.3)   (0.6)   (0.2)   (0.7)   (1.1)   (0.6)
Profit before income taxes    19.4    74.7    53.5    17.2    66.4    92.8    52.3 
Income taxes - income (expense)    (5.3)   (20.4)   (17.3)   (5.9)   (22.7)   (18.4)   (8.3)
Current    (5.4)   (20.9)   (18.1)   (8.0)   (31.0)   (13.0)   (11.3)
Deferred    0.1    0.5    0.8    2.2    8.3    (5.5)   3.0 
Profit for the period / year    14.1    54.3    36.2    11.3    43.6    74.4    43.9 
Profit (loss) attributable to:
Equity holders of the parent
   14.2    54.7    36.6    11.5    44.3    75.1    43.9 
Non-controlling interests    (0.1)   (0.4)   (0.4)   (0.2)   (0.6)   (0.7)    
Basic earnings per share – R$ (unless otherwise indicated)(2)    0.29    1.13    0.82    0.25    0.96    1.67    1.05 
Diluted earnings per share – R$ (unless otherwise indicated)(3)    0.29    1.11    0.81    0.25    0.95    1.65    1.05 

 
(1)For convenience purposes only, amounts in reais for the six months ended June 30, 2018 and for the year ended December 31, 2017 have been translated to U.S. dollars using an exchange rate of R$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 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.

 

 

 

 

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(2)Calculated by dividing the profit attributable to the shareholders of EAS Brazil by the weighted average number of common shares outstanding during the year.

 

(3)Calculated by adjusting the weighted average of common shares outstanding to assume conversion of all potential common shares with dilutive effects.

 

   As of June 30,  As of December 31,
   2018  2018  2017  2017  2016
   US$ millions(1)  R$ millions
(unaudited)
  US$ millions(1)  R$ millions
Balance Sheet Data:                         
Assets                         
Total current assets    46.2    178.2    54.5    210.0    162.0 
Total non-current assets    57.2    220.4    57.2    220.4    160.8 
Total assets    103.4    398.6    111.6    430.4    322.9 
Liabilities and Equity                         
Total current liabilities    15.0    57.9    18.1    69.7    50.1 
Total non-current liabilities    15.2    58.8    14.3    55.0    31.6 
Total liabilities    30.3    116.7    32.3    124.7    81.7 
Total equity    73.1    282.0    79.3    305.7    241.2 
Total liabilities and equity    103.4    398.6    111.6    430.4    322.9 
 
(1)For convenience purposes only, amounts in reais as of June 30, 2018 and as of December 31, 2017 have been translated to U.S. dollars using an exchange rate of R$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 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.

 

Non-GAAP Financial Measures

 

Adjusted EBITDA, Adjusted Net Income and Free Cash Flow

 

   For the Six Months Ended June 30,  For the Year Ended December 31,
   2018  2018  2017  2017  2017  2016  2015
   US$ millions(1)  R$ millions  US$ millions(1)  R$ millions
Adjusted EBITDA(2)    22.1    85.1    61.3    23.6    91.1    56.4    47.8 
Adjusted Net Income(3)    16.4    63.1    44.9    17.3    66.6    60.3    50.8 
Free Cash Flow(4)    18.2    70.2    70.6    13.3    51.3    34.1    19.0 
 
(1)For convenience purposes only, amounts in reais for the six months ended June 30, 2018 and for the year ended December 31, 2017 have been translated to U.S. dollars using an exchange rate of R$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 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 “Selected Financial and Other Information—Reconciliations for Non-GAAP Financial Measures—Reconciliation between Adjusted EBITDA and Profit for the Year.”

 

 

 

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(3)For a reconciliation of our Adjusted Net Income, see “Selected Financial and Other Information—Reconciliations for Non-GAAP Financial Measures— Reconciliation of Adjusted Net Income from Profit for the Year.”

 

(4)For a reconciliation of our Free Cash Flow, see “Selected Financial and Other Information—Reconciliations for Non-GAAP Financial Measures— Reconciliation of Free Cash Flow from Net Cash Flows from Operating Activities.”

 

Operating Data

 

ACV Bookings

 

   As of March 31,
    2018(2)   2018(2)   2017(3)   2016(4)   2015(5)
    US$ (Except number of enrolled students)(1)    R$ (Except number of enrolled students)
Number of enrolled students    n/a    405,814    322,031    265,354    156,011 
Average ticket per student per year   US$205.9    793.8    711.9    622.0    606.7 
ACV Bookings (in millions)(6)   US$83.5   R$322.1   R$229.3   R$165.1   R$94.7 
 
(1)For convenience purposes only, amounts in reais as of March 31, 2018 have been translated to U.S. dollars using an exchange rate of R$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 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 2018 school year (which we define for purposes of ACV bookings as the period starting in October 2017 and ending in September 2018).

 

(3)For the 2017 school year (which we define for purposes of ACV bookings as the period starting in October 2016 and ending in September 2017).

 

(4)For the 2016 school year (which we define for purposes of ACV bookings as the period starting in October 2015 and ending in September 2016). Includes the ACV Bookings of SAE, which we acquired in June 2016, for the full year 2016. On a standalone basis, SAE had ACV Bookings for the full year 2016 totaling R$21.5 million and net revenue totaling R$11.9 million. If the acquisition had taken place on January 1, 2016, SAE’s total net revenue would have been R$24.6 million and our total net revenue would have been R$172.7 million.

 

(5)For the 2015 school year (which we define for purposes of ACV bookings as the period starting in October 2014 and ending in September 2015).

 

(6)We define ACV Bookings as the revenue we would contractually expect to recognize from a partner school in each school year pursuant to the terms of our contract with such partner school, assuming no further additions or reductions in the number of enrolled students that will access our content at such partner school in such school year. ACV Bookings is a non-accounting managerial operating metric and is not prepared in accordance with IFRS. For more information about ACV Bookings, see “Presentation of Financial and Other Information—Special Note Regarding ACV Bookings.”

 

 

 

 

 

 

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Risk Factors

 

An investment in our Class A common shares involves a high degree of risk. In addition to the other information in this prospectus, you should carefully consider the following risk factors in evaluating us and our business before purchasing our Class A common shares. In particular, you should consider the risks related to an investment in companies operating in Brazil and Latin America generally, for which we have included information in these risk factors to the extent that information is publicly available. In general, investing in the securities of issuers whose operations are located in emerging market countries such as Brazil, involves a higher degree of risk than investing in the securities of issuers whose operations are located in the United States or other more developed countries. If any of the risks discussed in this prospectus actually occur, alone or together with additional risks and uncertainties not currently known to us, or that we currently deem immaterial, our business, financial condition, results of operations and prospects may be materially adversely affected. If this were to occur, the value of our Class A common shares may decline and you may lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this prospectus, including our financial statements and the related notes thereto. You should also carefully review the cautionary statements referred to under “Forward-looking statements.” Our actual results could differ materially and adversely from those anticipated in this prospectus.

 

Certain Factors Relating to Our Business and Industry

 

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. To compete effectively, we may be required to reduce our fees that we charge partner schools or increase our operating expenses in order 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 K-12 industry in Brazil. In the event that 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 National Exam for the Assessment of Student Performance (Exame Nacional de Desempenho de Estudantes), or ENADE, which is used by the Brazilian Education Ministry (Ministério da Educação), or MEC, to evaluate and grade our partner schools and their students, and the ENEM, for entry into post-secondary educational institutions. 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 labor market. 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 and International School, 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 are facing a number of expansion-related issues, such as the acquisition and retention of experienced and talented personnel, cash flow management, corporate culture 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 current expansion has placed a significant strain on management and on our operational and financial resources, and this 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, at no cost to us, decide to terminate our contracts with such partner schools, increasing our attrition rates. Our allowance for doubtful accounts expenses as a

 

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percentage of our net revenue was 1.6% and 1.3% for the six months ended June 30, 2018 and 2017 and 2.1%, 3.5% and 1.2% for the years ended December 31, 2017, 2016 and 2015, 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, adversely 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 is 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. If we do not increase our cash flow generation or gain access to additional capital, whether through a line or credit or other sources of capital, which may not be available on satisfactory terms or in adequate amounts, then our cash and cash equivalents may decline, which will have an adverse impact upon our liquidity and capital resources. We expect our working capital needs to increase as our business expands. If 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 acquired technologies, which could adversely affect our ability to develop and commercialize our products.

 

We acquire interests in third parties for the expansion, development or commercialization of our products. To date, we have acquired a 25% interest in WPensar, a company engaged in the development and licensing of school management systems software, with an option to acquire the remaining 75% of its outstanding share capital between 2020 and 2021. We have also acquired an 8.05% interest in Geekie, a company that provides adaptive assessment and learning products, as well as develop and license educational software, with an option to acquire the remaining 91.95% of its outstanding share capital in May 2022. 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. To date, we have not directly implemented the technologies related to these investments in our educational platform, but we may do so in the future. 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 may from time to time 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 into 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 integrate successfully 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. We may also require approval from Brazil’s Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica), or CADE, or other regulatory authorities, in order to conduct certain acquisitions or investments.

 

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.

 

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 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. Our business is particularly dependent on our chairman, who is also our controlling shareholder. 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 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

 

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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 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 B2B2C business, some parents 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. In certain cases, we may also face investigations and/or sanctions by the CADE, in the event our business practices are found to affect the competitiveness of the markets in which we operate or the consumers in such markets.

 

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 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

 

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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.

 

We recently engaged a third party consultant to conduct a risk and vulnerability assessment of our cybersecurity infrastructure. The third party report made the following key recommendations: (1) establish asset controls and create application lists to monitor and mitigate malware infection risk; (2) establish data-loss prevention measures for our hardware and servers; (3) develop a model to access and manage data through automation and controls of user profile information; (4) build an audit and event-log infrastructure throughout our software platforms to help us monitor potential cybersecurity breaches; (5) introduce scheduled routine infrastructure intrusion tests to verify the adequacy of our systems; (6) create background procedures to protect secure access to our video applications; and (7) establish a cybersecurity training and awareness program for our employees.  We are currently implementing the recommendations and intend to conclude their implementation by the second half of 2020.

 

Our revenue derives 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 educational platform and to which we supply the related educational materials currently comprises 1,140 partner schools. Our net revenue was R$244.4 million for the year ended December 31, 2017 and R$195.1 million for the six months ended June 30, 2018. We typically enter into contracts with our partner schools for three-year terms, 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 partner schools and 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 as a result 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 make visits and perform 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.

 

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 educational platform, 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.

 

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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 educational platform. For the six months ended June 30, 2018, operation, sales and corporate personnel expenses represented 38.8% and third-party services expenses represented 6.0% 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 as a result 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 change or review of the tax treatment of our activities, or the loss or reduction in tax benefits on the sale of books (including digital content) may materially adversely affect us.

 

We 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 books is also exempt by the Brazilian constitution from Brazilian municipal taxes, Brazilian 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 municipality or tax authority decides to change or review the 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.

 

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 educational platform we provide. We cannot assure you that we will be able to develop academic curricula for our educational platform with the same levels of excellence as existing curricula and meeting the requirements of the Base Nacional Comum Curricular, or the BNCC (established by Law No. 9,394 dated December 20, 1996), to which we are currently subject, or to which we may become subject in the future, or meeting the requirements of our partner schools. Deficiencies in the quality of academic curricula for our educational platform and the requirements of the BNCC may have a material adverse effect on our business.

 

In addition, our partner schools and their students are regularly evaluated and graded by the 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 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 are subject to the requirements of the BNCC, and we are not regulated by the MEC nor are we subject to any government regulations that are imposed by 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 government laws and regulations imposed by the CNE or the CEB, 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.

 

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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.

 

We utilize third-party logistics service providers for the shipping of all of 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.

 

Substantially all of the inventory for our printed teaching materials is 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 the date of this prospectus, we did not have issued patents or patent applications pending in or outside Brazil. We are party to approximately 1,100 agreements with third-party authors with respect to educational content, for indefinite terms. We own 37 trademark registrations. As of the date of this prospectus, we owned 62 registered domain names in Brazil. We also have a number of pending trademark applications in Brazil and the U.S. (73 in Brazil and 3 in the U.S., as of August 2018) and unregistered trademarks that we use to promote our brand. From time to time, we expect to file additional patent, copyright and trademark applications in Brazil and abroad. Nevertheless, these applications may not be approved or otherwise provide the full protection we seek. Any dismissal of our “Arco Educação” trademark application 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

 

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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;

 

·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 more effectively mimic our service and methods of operations, 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 in an effort to protect against these potential liabilities that could require us to spend substantial resources. Any costs incurred as a result 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

 

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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.

 

Most of our services are provided using proprietary software and our software is mainly developed by our employees, who do not specifically assign to us their copyrights over the software. In this regard, though applicable law establishes that employers shall have full title over rights relating to software developed by their employees, we could be subject to lawsuits by former employees claiming ownership of such software. 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 as a result of any of the foregoing or otherwise, 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 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 suppliers, students, faculty members, as well as environmental, competition, government agencies and tax authorities, particularly with respect to civil, tax 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 as a result 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. Adverse decisions in material legal, arbitrational or administrative proceedings, even if such proceedings are without merit, may adversely affect our reputation, results of operations and the price of our Class A common shares.

 

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 a number of 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 new Brazilian federal government to be elected in October 2018 will not impose legal restrictions or tax payments on dividend distributions by our subsidiaries.

 

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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. In particular, 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.

 

We operate in markets that are dependent on Information Technology (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 system implementation and 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 in order 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. 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.

 

Failure to comply with data privacy regulations could result in reputational damage to our brands and adversely affect our business, financial condition and results of operations.

 

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 adequately protect personally identifiable information could potentially lead to penalties, significant remediation costs, reputational damage, the cancellation of existing contracts and difficulty in competing for future business. 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.

 

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A material weakness in our internal control over financial reporting has been 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.

 

Prior to this offering, we were a private company with limited accounting personnel and other resources to address our internal control over financial reporting and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting. In connection with the audit of our consolidated financial statements, we and our independent registered public accounting firm identified one material weakness as of December 31, 2017. A material weakness 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. The material weakness identified relates to our insufficient accounting resources and processes necessary to comply with the reporting and compliance requirements of IFRS and the U.S. Securities and Exchange Commission, or the SEC.

 

We plan to adopt several measures that will improve our internal control over financial reporting, including increasing the depth and experience within our accounting and finance team, designing and implementing improved processes and internal controls, and retaining outside consultants with extensive technical expertise. However, we cannot assure you that our efforts will be effective or prevent any future material weakness or significant deficiency in our internal control over financial reporting.

 

After this offering, we will be 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. Under the current rules of the SEC starting in 2019 we will be required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to assess the effectiveness of our internal controls. Our testing may reveal deficiencies in our internal controls that are deemed to be material weaknesses or significant deficiencies and render our internal controls over financial reporting ineffective. We expect to incur additional accounting and auditing expenses and to spend significant management time in complying with these requirements. 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.

 

In addition, these new obligations will also require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business. These cost increases and the diversion of management’s attention could materially and adversely affect our business, financial condition and operation results.

 

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 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 restrictions. We have no control over and cannot predict what measures or policies the Brazilian government may take in the future. 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;

 

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·inflation;

 

·liquidity of the domestic capital and lending markets;

 

·import and export controls;

 

·exchange controls and restrictions on remittances abroad;

 

·modifications to laws and regulations according to political, social and economic interests;

 

·fiscal policy and changes in tax laws;

 

·economic, political and social instability;

 

·labor and social security regulations;

 

·energy and water shortages and rationing;

 

·commodity prices, including prices of paper and ink;

 

·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 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. Recent economic and political instability has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian securities markets, which also may adversely affect us and our Class A common shares. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations— Brazilian Macroeconomic Environment.”

 

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, and weak macroeconomic conditions in Brazil are expected to continue. In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigation, known as “Operação Lava Jato”, have negatively impacted the Brazilian economy and political environment. In August 2016, the Brazilian Senate approved the removal of Dilma Rousseff, Brazil’s then-President, from office, following a legal and administrative impeachment process for infringing budgetary laws. Michel Temer, the former Vice-President, who had previously assumed the interim presidency of Brazil in a caretaker capacity since the former President’s suspension in May, was sworn in by the Brazilian Senate to serve out the remainder of the presidential term until December 2018 (with general elections scheduled to take place in October 2018). In addition to a proceeding against the electoral alliance between the former President and the current one (former Vice-President) in connection with the 2014 elections was adjudicated by the Brazilian Higher Electoral Court (Tribunal Superior Eleitoral) and in June 2017, the Brazilian Higher Electoral Court absolved the former Vice-President (current President of Brazil) of wrongdoing. Despite this, he remains under investigation in connection with the ongoing “Operação Lava Jato” investigations. 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. 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. We also cannot predict which policies the

 

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current President of Brazil may adopt or change during his mandate or the effect that any such policies might have on our business and on the Brazilian economy. Any such new policies or changes to current policies may have a material adverse effect on us or the price of our Class A common shares. Furthermore, uncertainty over whether the acting Brazilian government will implement changes in policy or regulation in the future may contribute to economic uncertainty in Brazil and to heightened volatility in the securities offered by companies with significant operations in Brazil.

 

In addition, political demonstrations in Brazil over the last few years have affected the development of the Brazilian economy and investors’ perceptions of Brazil. For example, street protests, which started in mid-2013 and continued through 2016, demonstrated the public’s dissatisfaction with the worsening Brazilian economic condition (including an increase in inflation and fuel prices as well as rising unemployment), and the perception of widespread corruption. Moreover, in October 2018, elections will be held in Brazil for the following public offices: members of the federal house of representatives, members of the state houses of representatives, two-thirds of the senators, governors and President, which may cause instability deriving from eventual uncertainties related to policies that may be implemented by the new federal government. We cannot guarantee that the new federal government will not materially change the current policies and acts related to the Brazilian economy and that such changes will not affect our business.

 

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 in an attempt 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 2.9%, 6.3% and 10.7% in 2017, 2016 and 2015, 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 14.25% as of December 31, 2015 to 7.00% as of December 31, 2017, as established by the Monetary Policy Committee (Comitê de Política Monetária do Banco Central do Brasil—COPOM). On February 7, 2018, the Monetary Policy Committee reduced the SELIC rate to 6.75% and further reduced the SELIC rate to 6.50% on March 21, 2018. The Monetary Policy Committee reconfirmed the SELIC rate of 6.50% on May 16, 2018 and subsequently on June 20, 2018. 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 depreciated against the U.S. dollar by 32.0% at year-end 2015 as compared to year-end 2014, and by 11.8% at year-end 2014 as compared to year-end 2013. The real/U.S. dollar exchange rate reported by the Central Bank was R$3.9048 per U.S. dollar on December 31, 2015 and R$3.2591 per U.S. dollar on December 31, 2016, which reflected a 16.5% appreciation in the real against the U.S. dollar during 2016. The real/U.S. dollar exchange rate reported by the Central Bank was

 

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R$3.308 per U.S. dollar on December 31, 2017, which reflected a 1.5% depreciation in the real against the U.S. dollar during 2017. The real/U.S. dollar exchange rate reported by the Central Bank was R$3.856 per U.S.$1.00 on June 30, 2018, which reflected a 17.9% depreciation in the real against the U.S. dollar during the first six months of 2018. 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 growth has fluctuated over the past few years, with growth of 3.0% in 2013 but decreasing to 0.5% in 2014, a contraction of 3.8% in 2015, a contraction of 3.6% in 2016, and growth of 1.0% in 2017. Growth is limited by inadequate infrastructure, including potential energy shortages and deficient transportation, logistics and telecommunication sectors, 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. In June 2016, the United Kingdom had a referendum in which the majority voted to leave the European Union. We have no control over and cannot predict the effect of the United Kingdom’s exit from the European Union nor over whether and to which effect any other member state will decide to exit the European Union in the future. On January 20, 2017, Donald Trump became the President of the United States. We have no control over and cannot predict the effect of Donald Trump’s administration or policies. These developments, as well as potential crises and forms of political instability arising therefrom or any other as of yet unforeseen development, may harm our business and the price of our Class A common shares.

 

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Any further downgrading of Brazil’s credit rating could reduce the trading price of our Class A common shares.

 

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 ratings, which are based on a number of 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:

 

·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-negative.

 

·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.

 

·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 reasons, fiscal deficits, the increasing burden of public debt and an inability to implement reforms that would structurally improve Brazil’s public finances. 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. A prolongation or worsening of the current Brazilian recession and continued political uncertainty, among other factors, could lead to further ratings downgrades. 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.

 

Certain Factors Relating to Our Class A Common Shares and the Offering

 

There is no existing market for our common shares, and we do not know whether one will develop to provide you with adequate liquidity. If our share price fluctuates after this offering, you could lose a significant part of your investment.

 

Prior to this offering, there has not been a public market for our Class A common shares. If an active trading market does not develop, you may have difficulty selling any of our Class A common shares that you buy. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the Nasdaq, or otherwise or how liquid that market might become. The initial public offering price for our Class A common shares will be determined by negotiations between us and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our Class A common shares at prices equal to or greater than the price paid by you in this offering. In addition to the risks described above, the market price of our Class A common shares may be influenced by many factors, some of which are beyond our control, including:

 

·technological innovations by us or competitors;

 

·the failure of financial analysts to cover our Class A common shares after this offering or changes in financial estimates by analysts;

 

·actual or anticipated variations in our operating results;

 

·changes in financial estimates by financial analysts, or any failure by us to meet or exceed any of these estimates, or changes in the recommendations of any financial analysts that elect to follow our Class A common shares or the shares of our competitors;

 

·announcements by us or our competitors of significant contracts or acquisitions;

 

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·future sales of our shares; and

 

·investor perceptions of us and the industries in which we operate.

 

In addition, the stock market in general has experienced substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of our Class A common shares, regardless of our operating performance. In the past, following periods of volatility in the market price of certain companies’ securities, securities class action litigation has been instituted against these companies. This litigation, if instituted against us, could adversely affect our financial condition or results of operations. If a market does not develop or is not maintained, the liquidity and price of our Class A common shares could be seriously harmed.

 

The Founding Shareholders, our largest group of shareholders, will own 100% of our outstanding Class B common shares, which will represent approximately           % of the voting power of our issued share capital following this offering, and will control all matters requiring shareholder approval. This concentration of ownership and voting power limits your ability to influence corporate matters.

 

Immediately following this offering, the Founding Shareholders will control our company and will not hold any of our Class A common shares, but will beneficially own            % of our issued share capital (or          % if the underwriters’ option to purchase additional Class A common shares is exercised in full) through their beneficial ownership of all of our outstanding Class B common shares, and consequently,           % of the combined voting power of our issued share capital (or           % if the underwriters’ option to purchase additional Class A common shares is exercised in full). Our Class B common shares are entitled to 10 votes per share and our Class A common shares, which are the common shares we are offering in this offering, 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. They will also be able to direct our actions in areas such as business strategy, financing, distributions, acquisitions and dispositions of assets or businesses. For example, the Founding Shareholders 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 will be able to prevent any other shareholders, including you, from blocking these actions. For further information regarding shareholdings in our company, see “Principal Shareholders.”

 

So 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             % 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. If our Class B common shares at any time represent less than 10% of the combined voting power of our Class A common shares and Class B common shares together, however, the Class B common shares then outstanding will automatically convert into Class A common shares. For a description of the dual class structure, see “Description of Share Capital.”

 

Class A common shares eligible for future sale may cause the market price of our Class A common shares to drop significantly.

 

The market price of our Class A common shares may decline as a result of sales of a large number of our Class A common shares in the market after this offering (including Class A common shares issuable upon conversion of Class B common shares) or the perception that these sales may occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.

 

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Following the completion of this offering, we will have outstanding           Class A common shares and           Class B common shares (or           Class A common shares and           Class B common shares, if the underwriters exercise in full their option to purchase additional shares). Subject to the lock-up agreements described below, the Class A common shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act by persons other than our affiliates within the meaning of Rule 144 of the Securities Act.

 

Our shareholders or entities controlled by them or their permitted transferees will, subject to the lock-up agreements described below, be able to sell their shares in the public market from time to time without registering them, subject to certain limitations on the timing, amount and method of those sales imposed by regulations promulgated by the SEC. If any of our shareholders, the affiliated entities controlled by them or their respective permitted transferees were to sell a large number of their Class A common shares, the market price of our Class A common shares may decline significantly. In addition, the perception in the public markets that sales by them might occur may also cause the trading price of our Class A common shares to decline.

 

We have agreed with the underwriters, subject to certain exceptions, not to offer, sell or dispose of any shares in our share capital or securities convertible into or exchangeable or exercisable for any shares in our share capital during the 180-day period following the date of this prospectus. Our directors, executive officers and substantially all of our equityholders have agreed to substantially similar lock-up provisions. However, Goldman Sachs & Co. LLC may, in its sole discretion and without notice, release all or any portion of the shares from the restrictions in any of the lock-up agreements described above. In addition, these lock-up agreements are subject to the exceptions described in “Class A Common Shares Eligible for Future Sale,” including the right for our company to issue new shares if we carry out an acquisition or enter into a merger, joint venture or strategic participation.

 

Sales of a substantial number of our Class A common shares upon expiration of the lock-up agreements, the perception that such sales may occur, or early release of these lock-up periods, could cause our market price to fall or make it more difficult for you to sell your Class A common shares at a time and price that you deem appropriate.

 

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 will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no or too few securities or industry analysts commence coverage of our company, the trading price for our Class A common shares would likely be negatively affected. In the event securities or industry analysts initiate coverage, 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. 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.

 

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Transformation into a public company may increase our costs and disrupt the regular operations of our business.

 

This offering will have a significant transformative effect on us. Our business historically has operated as a privately-owned company, and we expect to incur significant additional legal, accounting, reporting and other expenses as a result of having publicly traded Class A common shares. We will also incur costs which we have not incurred previously, including, but not limited to, costs and expenses for directors’ fees, increased directors’ and officers’ insurance, investor relations, and various other costs of a public company.

 

We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as rules implemented by the SEC and Nasdaq. We expect these rules and regulations to increase our legal and financial compliance costs and make some management and corporate governance activities more time-consuming and costly, particularly after we are no longer an “emerging growth company.” These rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. This could have an adverse impact on our ability to recruit and bring on a qualified independent board. We estimate the additional costs we will incur as a public company, including costs associated with corporate governance requirements, will be approximately $           million on an annual basis.

 

The additional demands associated with being a public company may disrupt regular operations of our business by diverting the attention of some of our senior management team away from revenue producing activities to management and administrative oversight, adversely affecting our ability to attract and complete business opportunities and increasing the difficulty in both retaining professionals and managing and growing our businesses. Any of these effects could harm our business, financial condition and results of operations.

 

Our dual class capital structure means our shares will not be 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 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 has temporarily barred new multi-class listings from its ACWI Investable Market Index and U.S. Investable Market 2500 Index. 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 would make us ineligible 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. These policies are new and it is unclear what effect, if any, they will have on the valuations of publicly traded companies excluded from the indices, but it is possible that 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, which are the shares being sold in this offering, will entitle 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 (comprised 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 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

 

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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 such holder may maintain a proportional ownership interest in Arco pursuant to our Articles of Association).

 

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 “Description of Share Capital—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. In particular, 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 properly 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 “Description of Share Capital—Principal Differences between Cayman Islands and U.S. Corporate Law.”

 

New investors in our Class A common shares will experience immediate and substantial book value dilution after this offering.

 

The initial public offering price of our Class A common shares will be substantially higher than the pro forma net tangible book value per share of the outstanding Class A common shares immediately after the offering. Based on an assumed initial public offering price of $           per share (the midpoint of the price range set forth on the cover of this prospectus) and our net tangible book value as of             if you purchase our common shares in this offering you will pay more for your shares than the amounts paid by our existing shareholders for their shares and you will suffer immediate dilution of approximately $            per share in pro forma net tangible book value. In addition, purchasers of Class A common shares in this offering will have contributed approximately             % of the aggregate price paid by all purchasers of our Class A common shares but will own only approximately             % of our Class A common shares outstanding after this offering. As a result of this dilution, investors purchasing shares

 

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in this offering may receive significantly less than the full purchase price that they paid for the shares purchased in this offering in the event of a liquidation. See “Dilution.”

 

We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.

 

Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our Class A common shares. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, results of operations and financial condition. Pending their use, we may invest the net proceeds from this offering in a manner that does not produce income or that loses value. See “Use of Proceeds.”

 

As a foreign private issuer and an “emerging growth company” (as defined in the JOBS Act), we will have different disclosure and other requirements than U.S. domestic registrants and non-emerging growth companies.

 

As a foreign private issuer and emerging growth company, we may be subject to different disclosure and other requirements than domestic U.S. registrants and non-emerging growth companies. 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.

 

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.

 

The JOBS Act contains provisions that, among other things, relax certain reporting requirements for emerging growth companies. Under this act, as an emerging growth company, we will not be subject to the same disclosure and financial reporting requirements as non-emerging growth companies. For example, as an emerging growth company we are permitted to, and intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Also, we will not have to comply with future audit rules promulgated by the U.S. Public Company Accounting Oversight Board , or PCAOB, (unless the SEC determines otherwise) and our auditors will not need to attest to our internal controls under Section 404(b) of the Sarbanes-Oxley Act. We may follow these reporting exemptions until we are no longer an emerging growth company. As a result, our shareholders may not have access to certain information that they deem important. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual revenues of at least US$1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Class A common shares that is held by non-affiliates exceeds US$700.0 million as of the prior June 30th, and (2) the date on which we have issued more than US$1.0 billion in non-convertible debt during the prior three-year period. Accordingly, the information about us available to you will not be the same as, and may be more limited than, the information available to shareholders of a non-emerging growth company. We could be an “emerging growth company” for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our Class A common shares held by non-affiliates exceeds $700 million as of any June 30 (the

 

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end of our second fiscal quarter) before that time, in which case we would no longer be an “emerging growth company” as of the following December 31 (our fiscal year end). We cannot predict if investors will find our Class A common shares less attractive because we may rely on these exemptions. If some investors find our Class A common shares less attractive as a result, there may be a less active trading market for our Class A common shares and the price of our Class A common shares may be more volatile.

 

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 “Description of Share Capital—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.

 

In order 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 Law (as amended) 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 defined as under statutes or judicial precedent in existence in 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 merger or consolidation of a company. This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation 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 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 or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not 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.

 

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Subject to limited exceptions, under Cayman Islands’ law, a minority shareholder may not bring a derivative action against the board of directors. Class actions are not recognized in the Cayman Islands, but groups of shareholders with identical interests may bring representative proceedings, which are similar.

 

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 of 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 located 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.

 

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.

 

Each potential investor in our Class A common shares must therefore determine the suitability of that investment in light of its own circumstances. In particular, 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 prospectus;

 

·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;

 

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·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.

 

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Presentation of Financial and Other Information

 

All references to “IFRS” are to International Financial Reporting Standards, as issued by the IASB.

 

Financial Statements

 

Arco, the company whose Class A common shares are being offered in this prospectus, was incorporated on April 12, 2018, as a Cayman Islands exempted company with limited liability duly registered with the Cayman Islands Registrar of Companies. Until the contribution of Arco Brazil shares to it prior to the consummation of this offering, Arco will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments.

 

We present in this prospectus the unaudited interim condensed consolidated financial statements as of June 30, 2018 and for the six months ended June 30, 2018 and 2017 and the audited consolidated financial statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 of EAS Brazil. EAS Brazil is our principal operating company and a wholly-owned subsidiary of Arco Brazil. These unaudited interim condensed consolidated financial statements were prepared in accordance with IAS 34 and the audited  consolidated financial statements were prepared in accordance with IFRS, as issued by the IASB.

 

EAS Brazil maintains its books and records in Brazilian reais, the presentation currency for its financial statements and also the functional currency of our operations in Brazil. Unless otherwise noted, EAS Brazil’s financial information presented herein as of June 30, 2018 and for the six months ended June 30, 2018 and 2017 and as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 is stated in Brazilian reais, its reporting currency. The consolidated financial information of EAS Brazil contained in this prospectus is derived from EAS Brazil’s unaudited interim condensed consolidated financial statements as of June 30, 2018 and for the six months ended June 30, 2018 and 2017 and EAS Brazil’s audited consolidated financial statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015, together with the notes thereto. All references herein to “our financial statements,” “our unaudited interim condensed consolidated financial statements,” “our audited consolidated financial information,” and “our audited consolidated financial statements” are to EAS Brazil’s consolidated financial statements included elsewhere in this prospectus.

 

This financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the notes thereto, included elsewhere in this prospectus.

 

Following this offering, Arco will begin reporting consolidated financial information to shareholders, and EAS Brazil will not present consolidated financial statements.

 

We also maintain our books and records in Brazilian reais and our consolidated financial statements will be prepared in accordance with IFRS, as issued by the IASB.

 

EAS Brazil, Arco Brazil and our fiscal year ends on December 31. References in this prospectus to a fiscal year, such as “fiscal year 2017,” relate to our fiscal year ended on December 31 of that calendar year.

 

Corporate Events

 

Our Incorporation

 

We are a Cayman Islands exempted company incorporated with limited liability on April 12, 2018 for purposes of effectuating our initial public offering. At the time of our incorporation, the Founding Shareholders and the GA Entity held 7,476,705 shares of Arco Brazil, which are all of the shares of Arco Brazil, and Arco Brazil holds all the shares of EAS Brazil, our principal operating company whose consolidated financial statements are included elsewhere in this prospectus.

 

Our Corporate Reorganization

 

On February 19, 2018, SASPAR Participações Ltda., or SASPAR, through which the Founding Shareholders held their shares in Arco Brazil, was merged into Arco Brazil (formerly General Atlantic Participações S.A.). Following the merger, the total number of outstanding common shares of Arco Brazil was 7,476,705.

 

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Prior to the consummation of this offering, the Founding Shareholders and the GA Entity will contribute all of their shares in Arco Brazil to us.  In return for this contribution, we will issue 27,658,290 new Class B common shares to the Founding Shareholders and 9,725,235 new Class A common shares to the GA Entity in a one-to-five exchange for the shares of Arco Brazil contributed to us. Until the contribution of Arco Brazil shares to us, we will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments.

 

Prior to the consummation of this offering, our director Alberto Menache and his spouse, Fabiana Menache will, through Alfaco Holding Inc., a company incorporated in the British Virgin Islands, or Alfaco, and the shares of which Mr. and Mrs. Menache own 100%, purchase 99,725 Class A common shares of Arco, at a price equal to R$31.00 per share.

 

After accounting for the new Class A common shares that will be issued and sold by us in this offering, we will have a total of          common shares issued and outstanding immediately following this offering,          of these shares will be  Class B common shares beneficially owned by the Founding Shareholders, and           of these shares will be Class A common shares beneficially owned by investors purchasing in this offering.

 

The diagram below depicts our organizational structure, after giving effect to our corporate reorganization and this offering:

 

 

 

________________

(1)Includes Class B common shares beneficially owned by our Founding Shareholders.

 

(2)Includes Class A common shares beneficially owned by the GA Entity. See “Principal Shareholders.”

 

Furthermore, we plan to implement certain additional changes to the organizational structure of certain of our operating subsidiaries in Brazil. We expect to complete this reorganization during the first half of calendar year 2019. This reorganization will be an internal corporate reorganization and is not expected to affect us on a consolidated basis.

 

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Financial Information in U.S. Dollars

 

Solely for the convenience of the reader, we have translated some of the real amounts included in this prospectus 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$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 as reported by the Central Bank. See “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

 

Adjusted EBITDA, Adjusted Net Income and Free Cash Flow

 

This prospectus 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 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 for the year (or period) plus income taxes plus/minus finance result plus depreciation and amortization plus share of loss of equity-accounted investees plus share-based compensation plan.

 

We calculate Adjusted Net Income as profit for the year (or period) plus share-based compensation plan 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, and (v) non-compete agreement) less/plus changes in fair value of derivative instruments and contingent consideration (which refers to (i) changes in fair value of derivative instruments – finance income, plus (ii) changes in fair value of derivative instruments – finance costs, and plus (iii) changes in fair value of contingent consideration – finance costs) plus share of loss of equity-accounted investees plus interest expenses and plus/minus changes in deferred tax assets and liabilities recognized in profit or loss corresponding to financial instruments from acquisition of interests, share-based compensation and amortization of intangible assets.

 

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 a liquidity measure 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 calculation 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 “Selected Financial and Other Information—Reconciliations for Non-GAAP Financial Measures.”

 

Special Note Regarding ACV Bookings

 

This prospectus presents our ACV Bookings for the convenience of investors. This operating metric is not prepared in accordance with IFRS. ACV Bookings is a non-accounting managerial metric and represents our partner schools’ commitment 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. In particular, 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. 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 relating to the content

 

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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 statements of income, especially in view of our recent growth.

 

We define ACV Bookings as the revenue we would contractually expect to recognize from a partner school in each school year pursuant to the terms of our contract with such partner school, assuming no further additions or reductions in the number of enrolled students that will access our content at such partner school in such school year. We calculate ACV Bookings by multiplying the number of enrolled students at each partner school with the average ticket per student per year; the related number of enrolled students and average ticket per student per year are each calculated in accordance with the terms of each contract with the related partner school. 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.

 

We measure our ACV Bookings on a monthly basis 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 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. Average ticket per student per year reflects the average price per student for the relevant school year, and is presented in order to link this average price with the number of enrolled students in our partner schools, resulting in the ACV Bookings metric.

 

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 prospectus contains data related to economic conditions in the market in which we operate. The information contained in this prospectus 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 prospectus 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 prospectus relating to the industry in which we operate, as well as the estimates concerning market shares, through internal 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 United Nations Educational, Scientific and Cultural Organization, or UNESCO, the MEC, 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 Hoper Consultoria and Gismarket, consulting and research companies in the Brazilian education industry, and 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 prospectus, none of the publications, reports or other published industry sources referred to in this prospectus were commissioned by us or prepared at our request. Except as disclosed in this prospectus, we have not sought or obtained the consent of any of these sources to include such market data in this prospectus.

 

Rounding

 

We have made rounding adjustments to some of the figures included in this prospectus. 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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Cautionary Statement Regarding Forward-Looking Statements

 

This prospectus contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in this prospectus 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 prospectus 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 prospectus. 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;

 

·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 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;

 

·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;

 

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·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 “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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Use of Proceeds

 

We estimate that the net proceeds from our issuance and sale of shares of our Class A common shares in this offering will be approximately US$           (or US$       million if the underwriters exercise in full their option to purchase additional shares), assuming an initial public offering price of US$         per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

 

Each US$1.00 increase (decrease) in the assumed initial public offering price of US$          per share would increase (decrease) the net proceeds to us from this offering by approximately US$            , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately US$        million, assuming the assumed initial public offering price stays the same.

 

We intend to use the net proceeds from this offering to fund future acquisitions or investments in complementary businesses, products or technologies. Any remaining net proceeds will be used for general corporate purposes. We will have broad discretion in allocating the net proceeds from this offering.

 

Although we currently anticipate that we will use the net proceeds from this offering as described above, there may be circumstances where a reallocation of funds is necessary. The amounts and timing of our actual expenditures will depend upon numerous factors, including the factors described under “Risk Factors” in this prospectus. Accordingly, our management will have flexibility in applying the net proceeds from this offering. An investor will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds.

 

Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, interest-bearing instruments and Brazilian and U.S. government securities.

 

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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.

 

We have not declared or paid any dividends to our shareholders since our incorporation in the Cayman Islands on April 12, 2018. However, EAS Brazil, our principal operating company and the wholly-owned subsidiary of Arco Brazil, prior to the reorganization to be completed prior to the consummation of this offering, paid significant dividends to the shareholders of EAS Brazil, 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 EAS Brazil’s net profit for the year ended December 31, 2017, and pursuant to the Brazilian Corporate Law which requires EAS Brazil to pay a minimum dividend equal to 25% of its net profit for the year) which was declared by the management of EAS Brazil was approved at the EAS Shareholders’ Meeting, and paid to the shareholders of EAS Brazil on June 25, 2018. In addition, EAS Brazil approved an additional dividend of R$74.5 million on June 7, 2018, which was paid to the shareholders of EAS Brazil on June 25, 2018.

 

Certain Cayman Islands and Brazilian Legal Requirements Related to Dividends

 

Under the Companies Law 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 “Taxation—Cayman Islands Tax Considerations.”

 

Additionally, please refer to “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.

 

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Capitalization

 

The table below sets forth our total capitalization (defined as long-term debt and total equity) as of June 30, 2018, as follows:

 

·historical financial information of EAS Brazil, on an actual basis;

 

·Arco, as adjusted to give effect to (i) the contribution of Arco Brazil to Arco by the shareholders of Arco Brazil and (ii) the estimated tax effects on the tax deductible goodwill from the acquisition of interest of GA on EAS Brazil; and

 

·Arco, as further adjusted to give effect to (i) the constitution of Arco, (ii) the contribution of Arco Brazil to Arco by the shareholders of Arco Brazil, and (iii) the issuance and sale by Arco of the Class A common shares in the offering, and the receipt of approximately US$           (R$           ) in estimated net proceeds, considering an offering price of US$           (R$           ) per Class A common share (the midpoint of the range set forth on the cover of this prospectus), after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, and the use of proceeds therefrom (and assuming no exercise of the underwriters’ option to purchase additional shares and placement of all offered Class A common shares).

 

Investors should read this table in conjunction with our consolidated financial statements and the related notes included elsewhere in this prospectus, with the sections of this prospectus entitled “Selected Financial and Other Information,” with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with other financial information contained in this prospectus.

 

   As of June 30, 2018
   EAS Brazil, actual  Arco, as adjusted for the contribution and estimated tax effects(2)  Arco, as further adjusted for the contribution and the offering(3)
   (in millions of US$)(1)  (in millions of R$)  (in millions of US$)(1)  (in millions of R$) 

(in millions of

US$)(1)

 

(in millions of

R$)

Long-term debt, excluding current portion    -    -    -    -         
Total equity(4)    73.1    282.0    85.1    328.3         
Total capitalization(4)(5)    73.1    282.0    85.1    328.3         

 

 
(1)For convenience purposes only, amounts in reais as of June 30, 2018 have been translated to U.S. dollars at the exchange rate of R$3.856 to US$1.00. 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” and “Presentation of Financial and Other Information” for further information about recent fluctuations in exchange rates.

 

(2)As adjusted to reflect (i) the contribution of Arco Brazil to Arco by the shareholders of Arco Brazil and (ii) the estimated tax effects on the tax deductible goodwill from the acquisition of interest of GA on EAS Brazil.

 

(3)As further adjusted to reflect (i) the contribution of Arco Brazil to Arco by the shareholders of Arco Brazil, (ii) the estimated tax effects on the tax deductible goodwill from the acquisition of interest of GA on EAS Brazil, and (iii) the issuance and sale by Arco of the Class A common shares in the offering, and the receipt of approximately US$           (R$           ) in estimated net proceeds, considering an offering price of US$             (R$          ) per Class A common share (the midpoint of the range set forth on the cover of this prospectus), after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, and the use of proceeds therefrom (and assuming no exercise of the underwriters’ option to purchase additional shares and placement of all offered Class A common shares).

 

(4)Each US$1.00 increase (decrease) in the offering price per Class A common share would increase (decrease) our total capitalization and shareholders’ equity by R$            .

 

(5)Total capitalization consists of long-term debt (excluding current portion) plus total equity.

 

Other than as set forth above, there have been no material changes to our capitalization since June 30, 2018.

 

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Dilution

 

Prior to the consummation of this offering, the Founding Shareholders and the GA Entity will contribute all of their shares in Arco Brazil to us  In return for this contribution, we will issue 27,658,290 new Class B common shares to the Founding Shareholders and 9,725,235 new Class A common shares to the GA Entity in a one-to-five exchange for the shares of Arco Brazil contributed to us. Immediately prior to this initial public offering and after the share exchange, the Founding Shareholders, Alfaco and the GA Entity will hold all of our 37,483,250 issued and outstanding shares, and we will hold all of the 37,483,250 issued and outstanding shares in Arco Brazil.

 

We have presented the dilution calculation below on the basis of Arco Brazil’s net tangible book value as of June 30, 2018 because (i) until the contribution of Arco Brazil shares to it, Arco will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments; and (ii) the number of common shares of Arco in issuance prior to this offering was the same as the number of shares of Arco Brazil in issuance as of June 30, 2018 (after accounting for the one-to-five contribution) (which accounts for the merger of SASPAR into Arco Brazil on February 19, 2018, following which the total number of outstanding common shares of Arco Brazil was 7,476,705).

 

As of June 30, 2018, Arco Brazil (formerly General Atlantic Participações S.A.) had a net tangible book value of R$131.0 million, corresponding to a net tangible book value of R$17.47 per share. Net tangible book value represents the amount of our total assets less our total liabilities, excluding goodwill and other intangible assets, divided by 37,383,525, the total number of Arco Brazil shares outstanding as of June 30, 2018 (after giving effect to the one-to-five contribution).

 

After giving effect to the sale of the Class A common shares offered by us in the offering, and considering an offering price of US$            per Class A common share (the midpoint of the range set forth on the cover of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value estimated as of June 30, 2018 would have been approximately US$         , representing US$          per share. This represents an immediate increase in net tangible book value of US$          per share to existing shareholders and an immediate dilution in net tangible book value of US$          per share to new investors purchasing Class A common shares in this offering. Dilution for this purpose represents the difference between the price per Class A common shares paid by these purchasers and net tangible book value per Class A common share immediately after the completion of the offering.

 

If you invest in our Class A common shares, your interest will be diluted to the extent of the difference between the initial public offering price per Class A common share (when converted into reais) and the pro forma net tangible book value per Class A common share after accounting for the issuance and sale of new common shares in this offering.

 

Because the Class A common shares and Class B common shares of Arco have the same dividend and other rights, except for voting, preemption and conversion rights, we have counted the Class A common shares and Class B common shares equally for purposes of the dilution calculations below.

 

The following table illustrates this dilution to new investors purchasing Class A common shares in the offering.

 

Net tangible book value per share as of June 30, 2018 R$
Increase in net tangible book value per share attributable to new investors  
Pro forma net tangible book value per share after the offering  
Dilution per Class A common share to new investors  
Percentage of dilution in net tangible book value per Class A common share for new investors %

 

Each US$1.00 increase (decrease) in the offering price per Class A common share, respectively, would increase (decrease) the net tangible book value after this offering by US$           per Class A common share and the dilution to investors in the offering by US$           per Class A common share.

 

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Exchange Rates

 

The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.

 

The real depreciated against the U.S. dollar from mid-2011 to early 2016. In particular, during 2015, due to the poor economic conditions in Brazil, including as a result of political instability, the real depreciated at a rate that was much higher than in previous years. On September 24, 2015, the real fell to its lowest level since the introduction of the currency, at R$4.1945 per US$1.00. Overall in 2015, the real depreciated 47.0%, reaching R$3.9048 per US$1.00 on December 31, 2015. In 2016, the real fluctuated significantly, primarily as a result of Brazil’s political instability, appreciating 16.5% to R$3.2591 per US$1.00 on December 31, 2016. In 2017, the real depreciated 1.5% against the U.S. dollar, ending the year at an exchange rate of R$3.308 per U.S.$1.00. The real/U.S. dollar exchange rate reported by the Central Bank was R$3.856 per U.S.$1.00 on June 30, 2018, which reflected a 17.9% depreciation in the real against the U.S. dollar during the first six months of 2018, primarily as a result of lower interest rates in Brazil, which reduced the volume of foreign currency deposited in Brazil in the “carry trade,” as well as uncertainty regarding the results of the Brazilian presidential elections to be held in October 2018. There can be no assurance that the real will not depreciate or appreciate further against the U.S. dollar. The Central Bank has intervened occasionally in the foreign exchange market to attempt to control instability in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to allow the real to float freely or will intervene in the exchange rate market by re-implementing a currency band system or otherwise. The real may depreciate or appreciate substantially against the U.S. dollar in the future. Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are serious reasons to foresee a serious imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. We cannot assure you that the Brazilian government will not place restrictions on remittances of foreign capital abroad in the future.

 

The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rates for the purchase of U.S. dollars expressed in Brazilian reais per U.S. dollar. The average rate is calculated by using the average of reported exchange rates by the Central Bank on each day during a monthly period and on the last day of each month during an annual period. As of August 23, 2018, the exchange rate for the purchase of U.S. dollars as reported by the Central Bank was R$4.073 per US$1.00.

 

Year 

Period-end 

Average(1) 

Low 

High 

2013 2.343 2.161 1.953 2.446
2014 2.656 2.355 2.197 2.740
2015 3.905 3.339 2.575 4.195
2016 3.259 3.483 3.119 4.156
2017 3.308 3.203 3.051 3.381
         

Month 

Period-end 

Average(2) 

Low 

High 

February 2018 3.245 3.242 3.173 3.282
March 2018 3.324 3.279 3.225 3.338
April 2018 3.481 3.407 3.310 3.504
May 2018 3.737 3.636 3.531 3.750
June 2018 3.856 3.773 3.691 3.900
July 2018 3.755 3.829 3.712 3.926
August 2018 (through August 23, 2018) 4.073 3.862 3.712 4.074
         
 

Source: Central Bank.

 

(1)Represents the average of the exchange rates on the closing of each day during the year.

 

(2)Represents the average of the exchange rates on the closing of each day during the month.

 

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Market Information

 

Prior to this offering, there has been no public market for our Class A common shares. We cannot assure that an active trading market will develop for our Class A common shares, or that our Class A common shares will trade in the public market subsequent to the offering at or above the initial public offering price.

 

 

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Selected Financial and Other Information

 

The following tables set forth, for the periods and as of the dates indicated, our summary financial data. This information should be read in conjunction with “Presentation of Financial and Other Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements, including the notes thereto, included elsewhere in this prospectus.

 

The summary interim statements of financial position as of June 30, 2018 and the interim statements of income for the six months ended June 30, 2018 and 2017 of EAS Brazil, our principal operating company and a wholly-owned subsidiary of Arco Brazil, have been derived from the unaudited interim condensed consolidated financial statements of EAS Brazil included elsewhere in this prospectus, prepared in accordance with IAS 34. The summary statements of financial position as of December 31, 2017 and 2016 and the statements of income for the years ended December 31, 2017, 2016 and 2015 have been derived from the audited consolidated financial statements of EAS Brazil included elsewhere in this prospectus, prepared in accordance with IFRS, as issued by the IASB. The results of operations for the six months ended June 30, 2018 are not necessarily indicative of the results of operations that may be expected for the entire year ending December 31, 2018.

 

   For the Six Months Ended June 30,  For the Year Ended December 31,
   2018  2018  2017  2017  2017  2016  2015
   US$ millions(1)  R$ millions  US$ millions
(1)
  R$ millions
      (unaudited)      
Statement of Income Data                     
Net revenue    50.6    195.1    136.1    63.4    244.4    159.3    116.5 
Cost of sales    (11.1)   (42.7)   (34.4)   (15.2)   (58.5)   (41.3)   (28.0)
Gross profit    39.5    152.4    101.7    48.2    185.9    117.9    88.5 
Selling expenses    (12.6)   (48.4)   (29.1)   (17.0)   (65.3)   (40.3)   (20.3)
General and administrative expenses    (8.0)   (30.7)   (19.7)   (12.7)   (48.9)   (32.7)   (24.6)
Other income (expenses), net    0.6    2.2    1.2    0.9    3.3    3.6    (2.0)
Operating profit    19.6    75.4    54.1    19.4    74.9    48.6    41.6 
Finance income    1.9    7.3    7.9    3.2    12.5    47.2    14.4 
Finance costs    (2.0)   (7.8)   (7.9)   (5.3)   (20.4)   (1.8)   (3.1)
Finance result    (0.1)   (0.5)   (0.0)   (2.0)   (7.9)   45.4    11.3 
Share of loss of equity-accounted investees    (0.1)   (0.3)   (0.6)   (0.2)   (0.7)   (1.1)   (0.6)
Profit before income taxes    19.4    74.7    53.5    17.2   66.4    92.8    52.3 
Income taxes - income (expense)    (5.3)   (20.4)   (17.3)   (5.9)   (22.7)   (18.4)   (8.3)
Current    (5.4)   (20.9)   (18.1)   (8.0)   (31.0)   (13.0)   (11.3)
Deferred    0.1    0.5    0.8    2.2    8.3    (5.5)   3.0 
Profit for the period / year    14.1    54.3    36.2    11.3    43.6    74.4    43.9 
Profit (loss) attributable to:  
Equity holders of the parent
   14.2    54.7    36.6    11.5    44.3    75.1    43.9 
Non-controlling interests    (0.1)   (0.4)   (0.4)   (0.2)   (0.6)   (0.7)    
Basic earnings per share – R$ (unless otherwise indicated)(2)    0.29    1.13    0.82    0.25    0.96    1.67    1.05 
Diluted earnings per share – R$ (unless otherwise indicated)(3)    0.29    1.11    0.81    0.25    0.95    1.65    1.05 

 

 
(1)For convenience purposes only, amounts in reais for the six months ended June 30, 2018 and for the year ended December 31, 2017 have been translated to U.S. dollars using an exchange rate of R$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 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)Calculated by dividing the profit attributable to the shareholders of EAS Brazil by the weighted average number of common shares outstanding during the year.

 

(3)Calculated by adjusting the weighted average of common shares outstanding to assume conversion of all potential common shares with dilutive effects.

 

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   As of June 30,  As of December 31,
   2018  2018  2017  2017  2016
   US$ millions(1)  R$ millions
(unaudited)
  US$ millions(1)  R$ millions
Balance Sheet Data:                         
Assets                         
Current assets                         
Cash and cash equivalents    1.5    5.6    0.2    0.8    4.4 
Financial investments    12.8    49.5    21.5    83.0    65.6 
Trade receivables    21.5    83.0    24.6    94.9    65.2 
Inventories    4.3    16.5    4.9    18.8    12.6 
Taxes recoverable    2.1    8.0    1.3    5.1    3.2 
Financial instruments from acquisition of interests    -    -    -    -    4.5 
Accounts receivable from selling shareholders    -    -    -    -    2.5 
Other assets    4.0    15.6    1.9    7.3    4.1 
Total current assets    46.2    178.2    54.5    210.0    162.0 
Non-current assets                         
Financial instruments from acquisition of interests    3.7    14.3    3.2    12.5    16.1 
Deferred income tax    2.0    7.8    1.5    5.9    3.7 
Taxes recoverable    0.4    1.6    0.9    3.3    2.3 
Financial investments    0.1    0.2    0.1    0.2    0.2 
Other assets    0.4    1.6    0.3    1.3    0.8 
Investments and interests in other entities    3.2    12.4    3.3    12.7    45.8 
Property and equipment    2.6    10.0    2.4    9.1    5.7 
Intangible assets    44.8    172.6    45.5    175.5    86.3 
Total non-current assets    57.2    220.4    57.2    220.4    160.8 
Total assets    103.4    398.6    111.6    430.4    322.9 
Liabilities and Equity                         
Current liabilities                         
Trade payables    1.4    5.5    1.0    3.9    3.1 
Labor and social obligations    3.2    12.5    2.3    8.7    4.9 
Taxes and contributions payable    0.4    1.7    0.3    1.1    0.4 
Income taxes payable    4.5    17.2    4.5    17.4    2.6 
Dividends payable    -    -    2.7    10.5    17.8 
Advances from customers    3.5    13.5    1.5    5.9    1.9 
Financial instruments from acquisition of interests    0.5    2.1    0.5    1.8    4.7 
Accounts payable to selling shareholders    0.2    0.9    3.9    14.9    8.1 
Other liabilities    1.1    4.4    1.4    5.5    6.4 
Total current liabilities    15.0    57.9    18.1    69.7    50.1 
Non-current liabilities                         
Financial instruments from acquisition of interests    3.0    11.4    3.1    11.9    25.4 
Provision for legal proceedings    0.0    0.1    -    -    - 
Deferred income tax    -    -    0.0    0.1    6.2 
Accounts payable to selling shareholders    12.3    47.3    11.2    43.1    - 
Total non-current liabilities    15.2    58.8    14.3    55.0    31.6 
Total liabilities    30.3    116.7    32.3    124.7    81.7 
Equity                         
Share capital    14.5    55.9    14.5    55.9    48.5 
Capital reserve    41.7    160.7    41.7    160.7    81.9 

 

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   As of June 30,  As of December 31,
   2018  2018     2017  2016
   US$ millions(1)  R$ millions
(unaudited)
  US$ millions(1)  R$ millions
Earnings reserves    2.1    8.2    21.3    82.0    105.5 
Share-based compensation reserve    2.0    7.7    1.8    7.1    5.2 
Retained earnings    12.9    49.7    -    -    - 
Equity attributable to equity holders of the parent    73.2    282.1    79.3    305.6    241.1 
Non-controlling interests    (0.0)   (0.1)   0.0    0.1    0.1 
Total equity    73.1    282.0    79.3    305.7    241.2 
Total liabilities and equity    103.4    398.6    111.6    430.4    322.9 

 
(1)For convenience purposes only, amounts in reais as of June 30, 2018 and as of December 31, 2017 have been translated to U.S. dollars using an exchange rate of R$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 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.

 

Non-GAAP Financial Measures

 

Adjusted EBITDA, Adjusted Net Income and Free Cash Flow

 

   For the Six Months Ended June 30,  For the Year Ended December 31,
   2018  2018  2017  2017  2017  2016  2015
   US$ millions(1)  R$ millions  US$ millions(1)  R$ millions
Adjusted EBITDA(2)    22.1    85.1    61.3    23.6    91.1    56.4    47.8 
Adjusted Net Income(3)    16.4    63.1    44.9    17.3    66.6    60.3    50.8 
Free Cash Flow(4)    18.2    70.2    70.6    13.3    51.3    34.1    19.0 
 
(1)For convenience purposes only, amounts in reais for the six months ended June 30, 2018 and for the year ended December 31, 2017 have been translated to U.S. dollars using an exchange rate of R$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 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 (or period), see “Reconciliations for Non-GAAP Financial Measures—Reconciliation between Adjusted EBITDA and Profit for the Period / Year.”

 

(3)For a reconciliation of our Adjusted Net Income, see “Reconciliations for Non-GAAP Financial Measures—Reconciliation of Adjusted Net Income from Profit for the Period / 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.”

 

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Operating Data

 

ACV Bookings

 

   As of March 31,
    2018(2)   2018(2)   2017(3)   2016(4)   2015(5)
    US$ (Except number of enrolled students) (1)    R$ (Except number of enrolled students)
Number of enrolled students    n/a    405,814    322,031    265,354    156,011 
Average ticket per student per year   US$205.9    793.8    711.9    622.0    606.7 
ACV Bookings (in millions)(6)   US$83.5   R$322.1   R$229.3   R$165.1   R$94.7 
 
(1)For convenience purposes only, amounts in reais as of March 31, 2018 have been translated to U.S. dollars using an exchange rate of R$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 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 2018 school year (which we define for purposes of ACV bookings as the period starting in October 2017 and ending in September 2018).

 

(3)For the 2017 school year (which we define for purposes of ACV bookings as the period starting in October 2016 and ending in September 2017).

 

(4)For the 2016 school year (which we define for purposes of ACV bookings as the period starting in October 2015 and ending in September 2016). Includes the ACV Bookings of SAE, which we acquired in June 2016, for the full year 2016. On a standalone basis, SAE had ACV Bookings for the full year 2016 totaling R$21.5 million and net revenue totaling R$11.9 million. If the acquisition had taken place on January 1, 2016, SAE’s total net revenue would have been R$24.6 million and our total net revenue would have been R$172.7 million.

 

(5)For the 2015 school year (which we define for purposes of ACV bookings as the period starting in October 2014 and ending in September 2015).

 

(6)We define ACV Bookings as the revenue we would contractually expect to recognize from a partner school in each school year pursuant to the terms of our contract with such partner school, assuming no further additions or reductions in the number of enrolled students that will access our content at such partner school in such school year. ACV Bookings is a non-accounting managerial operating metric and is not prepared in accordance with IFRS. For more information about ACV Bookings, see “Presentation of Financial and Other Information—Special Note Regarding ACV Bookings.”

 

Reconciliations for Non-GAAP Financial Measures

 

The following tables set forth reconciliations of Adjusted EBITDA and Adjusted Net Income to our profit for the six months ended June 30, 2018 and 2017 and for the years ended December 31, 2017, 2016 and 2015, 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 six months ended June 30, 2018 and 2017 and for the years ended December 31, 2017, 2016 and 2015, 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—Adjusted EBITDA, Adjusted Net Income and Free Cash Flow.”

 

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Reconciliation between Adjusted EBITDA and Profit for the Period / Year

 

   For the Six Months Ended June 30,  For the Year Ended December 31,
Adjusted EBITDA reconciliation  2018  2018  2017  2017  2017  2016  2015
   US$ millions(1)  R$ millions  US$ millions(1)  R$ millions
Profit for the period / year    14.1    54.3    36.2    11.3    43.6    74.4    43.9 
(+) Income taxes    5.3    20.4    17.3    5.9    22.7    18.4    8.3 
(+/-) Finance result    0.1    0.5    -    2.0    7.9    (45.4)   (11.3)
(+) Depreciation and amortization    2.3    8.9    6.5    3.7    14.3    5.8    3.1 
(+) Share of loss of equity-accounted investees    0.1    0.3    0.6    0.2    0.7    1.1    0.6 
(+) Share-based compensation plan    0.2    0.7    0.7    0.5    1.9    2.0    3.1 
Adjusted EBITDA    22.1    85.1    61.3    23.6    91.1    56.4    47.8 
 
(1)For convenience purposes only, amounts in reais for the six months ended June 30, 2018 and for the year ended December 31, 2017 have been translated to U.S. dollars using an exchange rate of R$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 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)Our growth in profit for the year from 2015 to 2017 represents a compound annual growth rate, or CAGR, of (0.3)%.

 

(3)Our growth in Adjusted EBITDA from 2015 to 2017 represents a CAGR of 38.1%.

 

Reconciliation of Adjusted Net Income from Profit for the Period / Year

 

   For the Six Months Ended June 30,  For the Year Ended December 31,
Reconciliation of Adjusted Net Income  2018  2018  2017  2017  2017  2016  2015
   US$ millions(1)  R$ millions  US$ millions(1)  R$ millions
Profit for the period / year    14.1    54.3    36.2    11.3    43.6    74.4    43.9 
(+) Share-based compensation plan    0.2    0.7    0.7    0.5    1.9    2.0    3.1 
(+) Amortization of intangible assets from business combinations(2)    1.5    5.8    4.3    2.5    9.6    4.4    2.5 
(+/-) Changes in fair value of derivative instruments and contingent consideration(3)    (0.5)   (2.0)   (0.5)   1.7    6.7    (31.7)   2.1 
(+) Share of loss of equity-accounted investees    0.1    0.3    0.6    0.2    0.7    1.1    0.6 
(+) Interest expenses    1.2    4.8    5.5    2.9    11.2    0.1    0.4 
(+/-) Tax effects(4)    (0.2)   (0.8)   (1.9)   (1.8)   (7.1)   9.9    (1.8)
Adjusted Net Income    16.4    63.1    44.9    17.3    66.6    60.3    50.8 
 
(1)For convenience purposes only, amounts in reais for the six months ended June 30, 2018 and for the year ended December 31, 2017 have been translated to U.S. dollars using an exchange rate of R$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 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.

 

 

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(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, and (v) non-compete agreement. For further information, please see note 13 to the audited consolidated financial statements and note 11 to the unaudited interim condensed consolidated financial statements of EAS Brazil included elsewhere in this prospectus.

 

(3)Refers to (i) changes in fair value of derivative instruments – finance income, plus (ii) changes in fair value of derivative instruments – finance costs, and plus (iii) changes in fair value of contingent consideration – finance costs. For further information, please see note 21 to the audited consolidated financial statements and note 19 to the unaudited interim condensed consolidated financial statements of EAS Brazil included elsewhere in this prospectus.

 

(4)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, share-based compensation and amortization of intangible assets. For further information, please see note 22 to the audited consolidated financial statements and note 20 to the unaudited interim condensed consolidated financial statements of EAS Brazil included elsewhere in this prospectus.

 

Reconciliation of Free Cash Flow from Net Cash Flows from Operating Activities

 

   For the Six Months Ended June 30,  For the Year Ended December 31,
Reconciliation of Free Cash Flow  2018  2018  2017  2017  2017  2016  2015
   US$ millions(1)  R$ millions  US$ millions(1)  R$ millions
Net cash flows from operating activities    20.0    77.3    75.2    16.3    62.7    41.2    24.4 
Acquisition of property and equipment    (0.6)   (2.2)   (2.8)   (1.4)   (5.3)   (1.6)   (4.5)
Acquisition of intangible assets    (1.3)   (4.9)   (1.8)   (1.6)   (6.0)   (5.6)   (0.9)
Free Cash Flow    18.2    70.2    70.6    13.3    51.3    34.1    19.0 
 
(1)For convenience purposes only, amounts in reais for the six months ended June 30, 2018 and for the year ended December 31, 2017 have been translated to U.S. dollars using an exchange rate of R$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 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.

 

 

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Management’s Discussion and Analysis Of Financial Condition and Results of Operations

 

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited interim condensed consolidated financial statements as of June 30, 2018 and for the six months ended June 30, 2018 and 2017 and our audited consolidated financial statements as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015 and the notes thereto, included elsewhere in this prospectus, as well as the information presented under “Presentation of Financial and Other Information,” “Summary Financial and Other Information” and “Selected Financial and Other Information.”

 

The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those expressed or implied in such forward-looking statements as a result of various factors, including those set forth in “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors.”

 

Overview

 

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 to create 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 quickly and efficiently expand our footprint in Brazil.

 

Since our founding through 2018, we have achieved a compound annual growth rate, or CAGR (defined as the compounded average annual rate of growth between two periods) of 51% in terms of number of students, as shown in the chart below.

 

 

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 instructional content currently focused on English as a second language.

 

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As of March 31, 2018, we had more than 1,140 unique partner schools. These schools are spread across 453 cities located across all of the states of Brazil. Our partner schools base is highly diversified, which reduces our dependence on major accounts. Our 10 largest clients represented only 12.0% and 8.1% of our net revenue in 2017 and the six months ended June 30, 2018, respectively.

 

Our Cohort Economics

 

We believe that an annualized cohort analysis is a useful indicator of demand for our platform. We define a cohort as the amount spent by all of our partner schools on our platform over each 12-month period. We calculate the total contractual fees payable by our partner schools in each cohort as of the end of each academic year, or the yearly contract fee amount. These amounts increase as a result of (i) increases in the total number of enrolled students at our partner schools served by our platform, and (ii) annual adjustments of our contract fees. These amounts decrease when customers terminate their contracts, downgrade their contracts to a lower price point, or if there is a decrease in the number of enrolled students at our partner schools.

 

 

We focus on attracting new partner schools and increasing the value we offer to them. Accordingly, each cohort of new partner schools tends to generate higher fees payable to us over time. We have a track record of attracting new partner schools and increasing the amount of fees they pay us over time, as illustrated by the chart below.

 

Customer expansion can be seen in the Annual Contract Value, or ACV, growth in cohorts over the last four fiscal years. Our cohorts of customers from 2014 through 2017 have grown their ACV, on a real-weighted average basis, by an average of 30.0% by the end of 2014 (year 1), 40.0% by the end of 2015 (year 2), 48.0% by the end of 2016 (year 3), and 70.0% by the end of 2017 (year 4).

 

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(1)Represents on a real weighted-average basis, ACV growth for our partner schools (i) who entered into a contract with us in 2013, (ii) whose contract runs through 2018, and (iii) whose enrolled students were using our solutions as of March 31, 2018. Years 1 through 4 in the chart represent the number of years starting in the first year in which the partner school entered into a contract with us, which does not include ACV Bookings prior to 2014.

 

The strength of our partner schools base and our ability to expand sales is demonstrated in the growth in the increasing portion of our ACV from existing clients and upsell in existing clients, combining for 79.1% and 44.5% and 43.4% growth in 2016, 2017 and 2018, respectively.

 

 

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Our Growth

 

Our revenue growth has been driven by:

 

·Expansion of our partner school base: The increase in the number of partners schools using our educational platform.

 

·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, and (ii) cross-selling our Supplemental Solutions.

 

·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. Since 2011, we have successfully acquired or invested in 11 companies that have helped us expand our operations regionally and nationally, and also add new products and technologies.

 

Revenue Recognition and Seasonality

 

Prior to the adoption of IFRS 15, revenue was recognized when the significant risks and rewards of ownership have been transferred to the customer, recovery of the consideration is probable, the associated costs and possible return of educational content can be estimated reliably, there is no continuing management involvement with the educational content and the amount of revenue can be measured reliably. Upon the adoption of IFRS 15, revenue is recognized when the performance obligation is satisfied. We recognize our revenue at the moment we deliver our content to our partner schools in printed format or via access to 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 of 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. On average, 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.

 

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 at the moment of 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

 

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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 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:

 

Enrolled Students

 

The number of enrolled students is the primary operational metric our management reviews. 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 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.

 

As of March 31, 2018, 2017, 2016 and 2015, we had 405,814, 322,031, 265,354, and 156,011 enrolled students, respectively, representing a CAGR of 37.5%.

 

In our Core Curriculum segment, we had 363,824, 303,950, 265,354, and 156,011 students as of March 31, 2018, 2017, 2016 and 2015, respectively, representing a CAGR of 32.6%. In our Supplemental Solutions segment, which we began consolidating in our financial statements in 2017, we had 41,990 and 18,081 students as of March 31, 2018 and 2017, respectively.

 

The following table sets forth the number of enrolled students at our partner schools as of the dates indicated.

 

   As of March 31,
   2018  2017  2016  2015
 Number of enrolled students(1)     405,814    322,031    265,354    156,011 

 

ACV Bookings

 

ACV Bookings is an operating metric and represents our partner schools’ 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.

 

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We define ACV Bookings as the revenue we would contractually expect to recognize from a partner school in each school year pursuant to the terms of our contract with such partner school, assuming no further additions or reductions in the number of enrolled students that will access our content at such partner school in such school year. We calculate ACV Bookings by multiplying the number of enrolled students at each partner school with the average ticket per student per year, all in accordance with the terms of our contract with such partner school. 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.

 

We measure our ACV Bookings on a monthly basis 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 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.

 

The following table sets forth our ACV Bookings for the periods presented.

 

   As of March 31,
    2018(2)   2018(2)   2017(3)   2016(4)   2015(5)
    US$ (Except number of enrolled students) (1)    R$ (Except number of enrolled students)
Number of enrolled students    n/a    405,814    322,031    265,354    156,011 
Average ticket per student per year   US$205.9    793.8    711.9    622.0    606.7 
ACV Bookings (in millions)   US$83.5   R$322.1   R$229.3   R$165.1   R$94.7 
 
(1)For convenience purposes only, amounts in reais as of March 31, 2018 have been translated to U.S. dollars using an exchange rate of R$3.856 to US$1.00, the commercial selling rate for U.S. dollars as of June 30, 2018 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 2018 school year (which we define for purposes of ACV bookings as the period starting in October 2017 and ending in September 2018).

 

(3)For the 2017 school year (which we define for purposes of ACV bookings as the period starting in October 2016 and ending in September 2017).

 

(4)For the 2016 school year (which we define for purposes of ACV bookings as the period starting in October 2015 and ending in September 2016). Includes the ACV Bookings of SAE, which we acquired in June 2016, for the full year 2016. On a standalone basis, SAE had ACV Bookings for the full year 2016 totaling R$21.5 million and net revenue totaling R$11.9 million. If the acquisition had taken place on January 1, 2016, SAE’s total net revenue would have been R$24.6 million and our total net revenue would have been R$172.7 million.

 

(5)For the 2015 school year (which we define for purposes of ACV bookings as the period starting in October 2014 and ending in September 2015).

 

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(1)Includes the ACV Bookings of SAE, which we acquired in June 2016, for the full year 2016. On a standalone basis, SAE had ACV Bookings for the full year 2016 totaling R$21.5 million and net revenue totaling R$11.9 million. If the acquisition had taken place on January 1, 2016, SAE’s total net revenue would have been R$24.6 million and our total net revenue would have been R$172.7 million.

 

Retention rates

 

We measure our platform revenue retention rate by comparing the difference in revenue generated by our existing partner school base over a year compared to that of the previous year. In order to make the data comparable, we not take into account any price increases, cross-selling with different products or upselling to different school grades. We believe retention rates are an important measure of quality and customer satisfaction.

 

The following table sets forth our platform revenue retention rate for the periods presented.

 

   For the Year Ended December 31,
   2017  2016  2015
Revenue retention rate(1)    94.7%   90.8%   92.7%
 
(1)Calculated by comparing the difference in revenue generated by our existing partner school base over a year compared to that of the previous year.

 

Brazilian Macroeconomic Environment

 

We believe that our results of operations and financial performance will be affected by the following macroeconomic trends and factors:

 

All of 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.

 

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   For the Six Months Ended June 30,  For the Year Ended December 31,
   2018  2017  2017  2016  2015
Real growth (contraction) in gross domestic product    N/A    0.2%   1.0%   (3.5)%   (3.5)%
Inflation (IGP-M)(1)    5.4%   (2.0)%   (0.5)%   7.2%   10.5%
Inflation (IPCA)(2)    2.6%   1.2%   2.9%   6.3%   10.7%
Long-term interest rates – TJLP (average)(3)    6.7%   7.3%   7.0%   7.5%   6.2%
CDI interest rate (average)(4)    6.6%   11.8%   10.1%   14.1%   13.4%
Period-end exchange rate—reais per US$ 1.00    3.856    3.308    3.308    3.259    3.905 
Average exchange rate—reais per US$ 1.00(5)    3.427    3.181    3.203    3.483    3.339 
Appreciation (depreciation) of the real vs. US$ in the period (6)    (17.9)%   (1.1)%   (1.5)%   16.6%   (32.0)%
Unemployment rate(7)    12.8%   13.4%   12.7%   11.5%   8.5%
 

Source: FGV, IBGE, Central Bank and Bloomberg.

 

(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).

 

(4)The CDI (certificado de deposito interbancário) interest rate is an average of interbank overnight rates in Brazil (daily average for the 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.

 

Inflation directly affects approximately 34.1% of our current operating costs and expenses, adjusted by reference to indexes that reflect the inflation rate such as the IGP-M or IPCA. Historically, inflation has been offset by adjustments to the contractual fees per student that we charge our partner schools, the average adjustment of which was 8.5% for the years ended December 31, 2017, 2016 and 2015.

 

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.

 

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 for the production of 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.

 

Components of Our Results of Operations

 

Net Revenue

 

We generate substantially all of 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. We recognize our revenue at the moment we make our content available to our partner schools in printed format or via

 

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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, 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.

 

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 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.

 

·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. We expect general and administrative expenses to increase on an absolute real basis but decrease as a percentage of total revenue as we 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 share options 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 and changes in fair value of derivative instruments from business combinations and acquisition of interest in associates and joint ventures. Finance costs includes mainly of changes in fair value of derivatives instruments and interest expenses of liabilities from business combinations and other financial discounts and bank fees.

 

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Income taxes

 

Income taxes includes current and deferred income taxes. Deferred tax expenses are mainly related to provisions for bonuses, inventories reserve, allowance for doubtful accounts, share-based compensation plan, intangible amortization and derivatives from acquisition of interests and business combinations.

 

Results of Operations

 

Six Months Ended June 30, 2018 Compared to Six Months Ended June 30, 2017

 

The following table sets forth our unaudited interim condensed consolidated statements of income for the six months ended June 30, 2018 and 2017:

 

   For the Six Months Ended June 30,
   2018  2017  Variation (%)
   (in R$ millions, except for percentages)  
(unaudited)
Statement of Income Data:         
Net revenue    195.1    136.1    43.3%
Core(1)    161.9    126.8    27.7%
Supplemental(1)    33.1    9.3    257.3%
Cost of sales    (42.7)   (34.4)   24.3%
Gross profit    152.4    101.7    49.8%
Selling expenses    (48.4)   (29.1)   66.0%
General and administrative expenses    (30.7)   (19.7)   56.0%
Other income (expenses), net    2.2    1.2    77.2%
Operating profit    75.4    54.1    39.4%
Finance income    7.3    7.9    (7.8)%
Finance costs    (7.8)   (7.9)   (2.1)%
Finance result    (0.5)   (0.0)   N/A 
Share of loss of equity-accounted investees    (0.3)   (0.6)   (47.0)%
Profit before income taxes    74.7    53.5    39.4%
Income taxes - income (expense)    (20.4)   (17.3)   17.7%
Current    (20.9)   (18.1)   15.2%
Deferred    0.5    0.8    (36.9)%
Profit for the period    54.3    36.2    49.8%
Profit (loss) attributable to:               
Equity holders of the parent    54.7    36.6    49.3%
Non-controlling interests    (0.4)   (0.4)   2.1%
 
(1)Our operating segments consist of our Core segment and our Supplemental segment. For further information, please see note 21 to the unaudited interim condensed consolidated financial statements of EAS Brazil as of June 30, 2018 and for the six months ended June 30, 2018 and 2017, included elsewhere in this prospectus.

 

Net revenue

 

Net revenue for the six months ended June 30, 2018 was R$195.1 million, an increase of R$59.0 million, or 43.3%, from R$136.1 million for the six months ended June 30, 2017.

 

This increase was primarily attributable to:

 

(i)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 26.0% increase in the total number of students enrolled at our partner schools, to 405,814 students distributed across our partner schools as of March 31, 2018, from 322,031 students distributed across our partner schools as of March 31, 2017;

 

(ii)the 11.5% increase in the average contractual fees per student that we charge our partner schools, to R$793.8 per student for the six months ended June 30, 2018 from R$711.9 per student for the six months ended June 30, 2017; and

 

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(iii)the consolidation of the results of operations of International School into our financial statements starting in January 2017, as a result of our acquisition of a controlling interest in International School on January 23, 2017.

 

In our Core segment, net revenue for the six months ended June 30, 2018 was R$161.9 million, an increase of R$35.1 million, or 27.7%, from R$126.8 million for the six months ended June 30, 2017. In our Supplemental segment, net revenue for six months ended June 30, 2018 was R$33.1 million, an increase of R$23.8 million, or 257.3%, from R$9.3 million for the six months ended June 30, 2017.

 

Cost of sales

 

Cost of sales for the six months ended June 30, 2018 was R$42.7 million, an increase of R$8.3 million, or 24.3%, from R$34.4 million for the six months ended June 30, 2017. The increase of 24.3% was lower than our revenue growth, reflecting benefits from economies of scale, and was primarily attributable to:

 

(i)a R$4.4 million, or 90.6%, increase in operations personnel costs, mainly attributable to the 47.9% increase in the number of employees in our content and technology production team to strengthen our operations and support our growth strategy going forward; and

 

(ii)a R$1.8 million, or 7.7%, increase in our content providing costs and freight costs, mainly attributable to the overall increase in the production volume of our educational materials, as a result of the positive impact of our organic growth through the addition of new partner schools and an increase in up-sales of our solutions during the period.

 

As a percentage of net revenue, our cost of sales decreased to 21.9% for the six months ended June 30, 2018, compared to 25.2% for the six months ended June 30, 2017.

 

In our Core segment, cost of sales for the six months ended June 30, 2018 was R$37.3 million, an increase of R$4.3 million, or 13.3%, from R$33.0 million for the six months ended June 30, 2017. 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. As a percentage of net revenue in our Core segment, cost of sales decreased to 23.1% in the six months ended June 30, 2018, compared to 26.0% in the six months ended June 30, 2017.

 

In our Supplemental segment, cost of sales for the six months ended June 30, 2018 was R$5.4 million, an increase of R$4.0 million, or 284.0%, from R$1.4 million for the six months ended June 30, 2017. 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. As a percentage of net revenue in our Supplemental segment, cost of sales increased to 16.2% in the six months ended June 30, 2018, compared to 15.1% in the six months ended June 30, 2017.

 

Gross profit

 

For the reasons discussed above, gross profit for the six months ended June 30, 2018 was R$152.4 million, an increase of R$50.7 million, or 49.8%, from R$101.7 million for the six months ended June 30, 2017. In our Core segment, gross profit for the six months ended June 30, 2018 was R$124.6 million, an increase of R$30.7 million, or 32.8%, from R$93.9 million for the six months ended June 30, 2017. In our Supplemental segment, gross profit for the six months ended June 30, 2018 was R$27.8 million, an increase of R$19.9 million, or 252.6%, from R$7.9 million for the six months ended June 30, 2017.

 

Selling expenses

 

Selling expenses for the six months ended June 30, 2018 were R$48.4 million, an increase of R$19.3 million, or 66.0%, from R$29.1 million for the six months ended June 30, 2017. This increase was primarily attributable to:

 

(i)a R$8.7 million, or 65.9%, increase in sales personnel costs, mainly attributable to the 66.3% increase in the number of employees in our educational and pedagogical consulting teams to support our growth strategy going forward.

 

(ii)a R$5.2 million, or 163.7%, increase in customer support expenses, mainly due to the increase in our partner schools base across Brazil, as well as expenses related to promoting our growth strategy going forward.

 

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In our Core segment, selling expenses for the six months ended June 30, 2018 were R$39.2 million, an increase of R$13.9 million, or 55.0%, from R$25.3 million for the six months ended June 30, 2017. This increase was primarily attributable to an increase in (i) the number of employees in our educational and pedagogical consulting teams and, (ii) customer support expenses.

 

In our Supplemental segment, selling expenses for the six months ended June 30, 2018 were R$9.1 million, an increase of R$5.3 million, or 138.5%, from R$3.8 million for the six months ended June 30, 2017. This increase was primarily attributable to an increase in (i) the number of employees in our educational and pedagogical consulting teams, and (ii) customer support expenses.

 

General and administrative expenses

 

General and administrative expenses for the six months ended June 30, 2018 were R$30.7 million, an increase of R$11.0 million, or 56.0%, from R$19.7 million for the six months ended June 30, 2017. This increase was primarily attributable to:

 

(i)a R$4.9 million increase in corporate personnel expenses totaling R$16.0 million for the six months ended June 30, 2018, due to the 71.1% increase in number of  employees in our general administrative team, from 218 employees as of June 30, 2017, to 373 employees as of June 30, 2018; and

 

(ii)a R$3.9 million increase in third party services expenses totaling R$7.3 million for the six months ended June 30, 2018, attributable to expenses relating to (i) the creation of our shared services center in order to centralize our administrative expenses and internal controls across our business segments, and (ii) the creation of our new value creation team.

 

Operating profit

 

For the reasons discussed above, operating profit for the six months ended June 30, 2018 was R$75.4 million, an increase of R$21.3 million, or 39.4%, from R$54.1 million for the six months ended June 30, 2017.

 

Finance result

 

Finance result for the six months ended June 30, 2018 was a finance cost, net of R$0.5 million, a change of R$0.5 million,  from a finance cost, net of R$0 for the six months ended June 30, 2017, for the reasons described below.

 

Finance income. Finance income for the six months ended June 30, 2018 was R$7.3 million, a decrease of R$0.6 million, or 7.8%, from R$7.9 million for the six months ended June 30, 2017. This decrease was primarily attributable to the decrease in income from financial investments and changes in fair value of financial investments, as a result of the decrease of interest rates, which was partially offset by the increase in fair value of our derivative financial instruments, comprised of the put and call options of our business acquisitions and investments in associates and joint ventures.

 

Finance costs. Finance costs for the six months ended June 30, 2018 was R$7.8 million, a decrease of R$0.1 million, from R$7.9 million for the six months ended June 30, 2017. This decrease was primarily attributable to a decrease in the interest expenses from accounts payable to selling shareholders and the fair value of our derivative financial instruments, comprised of the put and call options of our business acquisitions and investments in associates and joint ventures.

 

Profit before income taxes

 

For the reasons discussed above, profit before income taxes for the six months ended June 30, 2018 was R$74.7 million, an increase of R$21.2 million, or 39.4%, from R$53.5 million for the six months ended June 30, 2017.

 

Income taxes—income (expense)

 

Income taxes expenses for the six months ended June 30, 2018 was R$20.4 million, an increase of R$3.1 million, or 17.7%, from R$17.3 million for the six months ended June 30, 2017. This increase was primarily attributable to the growth in our taxable income.

 

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Profit for the period

 

As a result of the foregoing, profit for the six months ended June 30, 2018 was R$54.3 million, an increase of R$18.1 million, or 49.8%, from R$36.2 million for the six months ended June 30, 2017.

 

   Year Ended December 31, 2017 Compared to Year Ended December 31, 2016

 

The following table sets forth our consolidated statements of income for the years ended December 31, 2017 and 2016:

 

   For the Year Ended December 31,
   2017  2016  Variation (%)
   (in R$ millions, except for percentages)
Statement of Income Data:         
Net revenue    244.4    159.3    53.4%
Core(1)    219.0    159.3    37.5%
Supplemental(1)    25.4    -    n.m. 
Cost of sales    (58.5)   (41.3)   41.6%
Gross profit    185.9    117.9    57.6%
Selling expenses    (65.3)   (40.3)   62.0%
General and administrative expenses    (48.9)   (32.7)   49.9%
Other income (expenses), net    3.3    3.6    (8.5)%
Operating profit    74.9    48.6    54.2%
Finance income    12.5    47.2    (73.4)%
Finance costs    (20.4)   (1.8)   1030.8%
Finance result    (7.9)   45.4    (117.3)%
Share of loss of equity-accounted investees    (0.7)   (1.1)   (36.5)%
Profit before income taxes    66.4    92.8    (28.5)%
Income taxes - income (expense)    (22.7)   (18.4)   23.2%
Current    (31.0)   (13.0)   139.3%
Deferred    8.3    (5.5)   (251.3)%
Profit for the year    43.6    74.4    (41.3)%
Profit (loss) attributable to:               
Equity holders of the parent    44.3    75.1    (41.1)%
Non-controlling interests    (0.6)   (0.7)   (16.2)%
 
(1)Our operating segments consist of our Core segment and our Supplemental segment. For further information, please see note 23 to the audited consolidated financial statements of EAS Brazil as of December 31, 2017 and 2016 and for the years ended December 31, 2017, 2016 and 2015, included elsewhere in this prospectus.

 

Net revenue

 

Net revenue for the year ended December 31, 2017 was R$244.4 million, an increase of R$85.1 million, or 53.4%, from R$159.3 million for the year ended December 31, 2016.

 

This increase was primarily attributable to:

 

(i)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 21.4% increase in the total number of students enrolled at our partner schools, to 322,031 students distributed across our partner schools as of March 31, 2017, from 265,354 students distributed across our partner schools as of March 31, 2016.

 

(ii)the 14.5% increase in the average contractual fees per student that we charge our partner schools, to R$711.9 per student for the year ended December 31, 2017 from R$622.0 per student for the year ended December 31, 2016;

 

(iii)the consolidation of the results of operations of SAE into our financial statements starting in June 2016, as a result of our acquisition of a controlling interest in SAE on June 27, 2016; and

 

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(iv)the consolidation of the results of operations of International School into our financial statements starting in January 2017, as a result of our acquisition of a controlling interest in International School on January 23, 2017.

 

In our Core segment, net revenue for the year ended December 31, 2017 was R$219.0 million, an increase of R$59.7 million, or 37.5%, from R$159.3 million for the year ended December 31, 2016.

 

This increase was primarily attributable to:

 

(i)the consolidation of the results of operations of SAE into our financial statements starting in June 2016, as a result of our acquisition of a controlling interest in SAE on June 27, 2016;

 

(ii)the 14.5% increase in the number of enrolled students at partner schools, to 303,950 enrolled students as of March 31, 2017, from 265,354 enrolled students as of March 31, 2016; and

 

(iii)the 10.6% overall increase in the average contractual fees per student payable by partner schools, to R$687.9 per student for the year ended December 31, 2017, from R$622.0 per student for the year ended December 31, 2016.

 

In our Supplemental segment, net revenue for the year ended December 31, 2017 was R$25.4 million, an increase of R$25.4 million, from no net revenue for the year ended December 31, 2016. We did not have a Supplemental segment prior to 2017. This increase was primarily attributable to the consolidation of the results of operations of International School into our financial statements starting in January 2017, as a result of our acquisition of a controlling interest in International School on January 23, 2017.

 

Cost of sales

 

Cost of sales for the year ended December 31, 2017 was R$58.5 million, an increase of R$17.2 million, or 41.6%, from R$41.3 million for the year ended December 31, 2016. This increase was primarily attributable to:

 

(i)a R$13.7 million, or 54.9%, increase in our content providing costs and freight costs, mainly attributable to the consolidation of SAE and International School into our financial statements starting in June 2016 and January 2017, respectively, as well as the overall increase in the production volume of our educational materials, as a result of the positive impact of our organic growth through the addition of new partner schools and an increase in up-sales of our solutions during the period; and

 

(ii)a R$1.8 million, or 19.6%, increase in operations personnel costs, mainly attributable to (i) the consolidation of SAE and International School into our financial statements starting in June 2016 and January 2017, and (ii) the 27.4% increase in the number of employees in our content and technology production team.

 

As a percentage of net revenue, our cost of sales decreased to 23.9% for the year ended December 31, 2017, compared to 25.9% for the year ended December 31, 2016. We expect these costs to continue to decrease as our products achieve greater scale going forward.

 

In our Core segment, cost of sales for the year ended December 31, 2017 was R$54.3 million, an increase of R$13.0 million, or 31.4%, from R$41.3 million for the year ended December 31, 2016. This increase was primarily attributable to the consolidation of the results of operations of SAE into our financial statements starting in June 2016, as a result of our acquisition of a controlling interest in SAE on June 27, 2016. As a percentage of net revenue in our Core segment, cost of sales decreased to 24.8% in 2017, compared to 25.9% in 2016.

 

In our Supplemental segment, cost of sales for the year ended December 31, 2017 was R$4.2 million, an increase of R$4.2 million, from no cost of sales for the year ended December 31, 2016. This increase was primarily attributable to the consolidation of the results of operations of International School into our financial statements starting in January 2017 as a result of our acquisition of a controlling interest in International School on January 23, 2017. As a percentage of net revenue in our Supplemental segment, cost of sales represented 16.5% in 2017.

 

Gross profit

 

For the reasons discussed above, gross profit for the year ended December 31, 2017 was R$185.9 million, an increase of R$67.9 million, or 57.6%, from R$117.9 million for the year ended December 31, 2016. In our Core

 

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segment, gross profit for the year ended December 31, 2017 was R$164.6 million, an increase of R$46.7 million, or 39.6%, from R$117.9 million for the year ended December 31, 2016. In our Supplemental segment, gross profit for the year ended December 31, 2017 was R$21.2 million, an increase of R$21.2 million, from no gross profit for the year ended December 31, 2016.

 

Selling expenses

 

Selling expenses for the year ended December 31, 2017 were R$65.3 million, an increase of R$25.0 million, or 62.0%, from R$40.3 million for the year ended December 31, 2016. This increase was primarily attributable to the consolidation of SAE and International School into our financial statements starting in June 2016 and January 2017, respectively, resulting in:

 

(i)a R$10.1 million, or 61.0%, increase in sales personnel expenses mainly as a result of the increase in the number of employees in our sales team;

 

(ii)a R$3.2 million, or 53.3%, increase in sales and marketing expenses mainly as a result of marketing events aimed at strengthening our brands;

 

(iii)a R$4.1 million, or 101.6%, increase in customer support expenses; and

 

(iv)a R$5.3 million, or 117.5%, increase in amortization of intangible assets and depreciation of property and equipment.

 

In our Core segment, selling expenses for the year ended December 31, 2017 were R$56.3 million, an increase of R$16.0 million, or 39.7%, from R$40.3 million for the year ended December 31, 2016. This increase was primarily attributable to the consolidation of the results of operations of SAE into our financial statements starting in June 2016, as a result of our acquisition of a controlling interest in SAE on June 27, 2016, which increased our sales personnel expenses, and our sales and marketing and services expenses.

 

In our Supplemental segment, selling expenses for the year ended December 31, 2017 were R$9.0 million, an increase of R$9.0 million, from no selling expenses for the year ended December 31, 2016. This increase was primarily attributable to the consolidation of the results of operations of International School into our financial statements starting in January 2017, as a result of our acquisition of a controlling interest in International School on January 23, 2017, which increased our sales personnel expenses, and our sales and marketing and services expenses.

 

General and administrative expenses

 

General and administrative expenses for the year ended December 31, 2017 were R$48.9 million, an increase of R$16.3 million, or 49.9%, from R$32.7 million for the year ended December 31, 2016. The increase in general and administrative expenses was primarily attributable to:

 

(i)a R$9.9 million increase in corporate personnel expenses totaling R$24.6 million for the year ended December 31, 2017, mainly as a result of the consolidation of SAE and International School into our financial statements starting in June 2016 and January 2017, respectively, resulting in a 67.6% increase in our corporate personnel expenses due to the 37.3% increase in employees, from 603 employees in 2016, to 828 employees in 2017; and

 

(ii)expenses related to the creation of our shared services center to centralize our administrative expenses across our business segments.

 

Operating profit

 

For the reasons discussed above, operating profit for the year ended December 31, 2017 was R$74.9 million, an increase of R$26.3 million, or 54.2%, from R$48.6 million for the year ended December 31, 2016.

 

Finance result

 

Finance result for the year ended December 31, 2017 was a finance cost, net of R$7.9 million, a change of R$53.2 million, or 117.3%, from a finance income, net of R$45.4 million for the year ended December 31, 2016, for the reasons described below.

 

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Finance income. Finance income for the year ended December 31, 2017 was R$12.5 million, a decrease of R$34.6 million, or 73.4%, from R$47.2 million for the year ended December 31, 2016. This decrease was primarily attributable to the decrease in the fair value of our derivative financial instruments, comprised of the put and call options of our business acquisitions and investments in associates and joint ventures.

 

Finance costs. Finance costs for the year ended December 31, 2017 was R$20.4 million, an increase of R$18.6 million, from R$1.8 million for the year ended December 31, 2016. This increase was primarily attributable to the increase in the expenses from accounts payable to selling shareholders and the fair value of our derivative financial instruments, comprised of the put and call options of our business acquisitions and investments in associates and joint ventures.

 

Share of loss of equity-accounted investees

 

Share of loss of equity-accounted investees for the year ended December 31, 2017 was a loss of R$0.7 million, as compared to a loss of R$1.1 million for the year ended December 31, 2016, mainly attributable to a net loss as a result of our investment in WPensar, and a net loss in 2016 as a result of our investment in International School prior to our acquisition of a controlling interest in International School on January 23, 2017.

 

Profit before income taxes

 

For the reasons discussed above, profit before income taxes for the year ended December 31, 2017 was R$66.4 million, a decrease of R$26.5 million, or 28.5%, from R$92.8 million for the year ended December 31, 2016.

 

Income taxes

 

Income taxes expenses for the year ended December 31, 2017 was R$22.7 million, an increase of R$4.3 million, or 23.2%, from R$18.4 million for the year ended December 31, 2016. This increase was primarily attributable to an increase in our taxable income and certain of our subsidiaries generated revenues above R$78 million in 2017 and in 2016 were taxed pursuant to the presumed profit regime, which tax rate is lower than the 34% statutory tax rate.

 

Profit for the year

 

As a result of the foregoing, profit for the year ended December 31, 2017 was R$43.6 million, a decrease of R$30.8 million, or 41.3%, from R$74.4 million for the year ended December 31, 2016.

 

Year Ended December 31, 2016 Compared to Year Ended December 31, 2015

 

The following table sets forth our consolidated statements of income for the years ended December 31, 2016 and 2015:

 

   For the Year Ended December 31,
   2016  2015  Variation (%)
   (in R$ millions, except for percentages)
Statement of Income Data:         
Net revenue    159.3    116.5    36.7%
Cost of sales    (41.3)   (28.0)   47.4%
Gross profit    117.9    88.5    33.3%
Selling expenses    (40.3)   (20.3)   98.7%
General and administrative expenses    (32.7)   (24.6)   32.7%
Other income (expenses), net    3.6    (2.0)   (279.0)%
Operating profit    48.6    41.6    16.9%
Finance income    47.2    14.4    227.7%
Finance costs    (1.8)   (3.1)   (41.8)%
Finance result    45.4    11.3    301.7%
Share of loss of equity-accounted investees    (1.1)   (0.6)   89.9%
Profit before income taxes    92.8    52.3    77.6%
Income taxes - income (expense)    (18.4)   (8.3)   121.2%
Current    (13.0)   (11.3)   14.6%
Deferred    (5.5)   3.0    (284.7)%
Profit for the year    74.4    43.9    69.4%
Profit (loss) attributable to:
Equity holders of the parent
   75.1    43.9    71.1%
Non-controlling interests    (0.7)   -    n.m. 

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Net revenue

 

Net revenue for the year ended December 31, 2016 was R$159.3 million, an increase of R$42.8 million, or 36.7%, from R$116.5 million for the year ended December 31, 2015. This increase was primarily attributable to:

 

(i)the consolidation of the results of operations of SAE into our financial statements starting in June 2016;

 

(ii)the 70.1% increase in the number of enrolled students at partner schools, to 265,354 enrolled students as of March 31, 2016, from 156,011 students as of March 31, 2015; and

 

(iii)the 2.5% overall increase in the average contractual fees per student payable by partner schools, to R$622.0 per student for the year ended December 31, 2016, from R$606.7 per student for the year ended December 31, 2015.

 

Cost of sales

 

Cost of sales for the year ended December 31, 2016 was R$41.3 million, an increase of R$13.3 million, or 47.4%, from R$28.0 million for the year ended December 31, 2015. This increase was primarily attributable to:

 

(i)a R$8.4 million, or 51.9%, increase in our content providing costs and other costs related to the delivery of our content, mainly attributable to the consolidation of SAE into our financial statements as well as the overall increase in the production volume of our educational materials, as a result of the positive impact of our organic growth through the addition of new partner schools and an increase in up-sales of our solutions during the period;

 

(ii)a R$2.4 million, or 117.7%, increase in inventory reserves expenses; and

 

(iii)a R$2.3 million, or 34.4%, increase in operations personnel costs, mainly attributable to a 7.7% increase in the number of employees in our content and technology production team. As a percentage of net revenue, our consolidated cost of sales increased to 25.9% for the year ended December 31, 2016, compared to 24.1% for the year ended December 31, 2015. We expect these costs to decrease as our products achieve greater scale going forward.

 

Gross profit

 

For the reasons discussed above, gross profit for the year ended December 31, 2016 was R$117.9 million, an increase of R$29.5 million, or 33.3%, from R$88.5 million for the year ended December 31, 2015.

 

Selling expenses

 

Selling expenses for the year ended December 31, 2016 were R$40.3 million, an increase of R$20.0 million, or 98.7%, from R$20.3 million for the year ended December 31, 2015. This increase was mainly due to the consolidation of the results of operations of SAE into our financial statements starting in June 2016, and was primarily attributable to:

 

(i)a R$8.1 million, or 96.3%, increase in sales personnel expenses as a result of the increase in the number of employees in our sales team;

 

(ii)a R$3.5 million, or 136.0%, increase in sales and marketing expenses related to marketing events aimed at strengthening our premium content brands;

 

(iii)a R$0.6 million, or 16.8%, increase in customer support expenses; and

 

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(iv)a R$4.2 million increase in our allowance for doubtful accounts, as a result of the impact of our organic growth through the addition of new partner schools, some of which pose a higher payment delinquency or default risk.

 

General and administrative expenses

 

General and administrative expenses for the year ended December 31, 2016 were R$32.7 million, an increase of R$8.1 million, or 32.7%, from R$24.6 million for the year ended December 31, 2015. The increase in general and administrative expenses was primarily attributable to:

 

(i)a R$2.3 million increase in corporate personnel expenses, totaling R$14.7 million for the year ended December 31, 2016, mainly as a result of the consolidation of SAE into our financial statements starting in June 2016, resulting in a 18.6% increase in our corporate personnel expenses due to the 32.8% increase in employees, from 454 employees in 2015, to 603 employees in 2016; and

 

(ii)fines totaling R$2.4 million in connection with the payment of a contractual termination fee to Colegio Integral in the state of Bahia (BA).

 

Other income (expenses), net

 

Other income (expenses), net for the year ended December 31, 2016 was an income of R$3.6 million, an increase of R$5.6 million, from an expense of R$2.0 million for the year ended December 31, 2015.

 

Operating Profit

 

For the reasons discussed above, operating profit for the year ended December 31, 2016 was R$48.6 million, an increase of R$7.0 million, or 16.9%, from R$41.6 million for the year ended December 31, 2015.

 

Finance result

 

Finance result for the year ended December 31, 2016 was R$45.4 million, an increase of R$34.1 million, or 301.7%, from R$11.3 million for the year ended December 31, 2015.

 

Finance income. Finance income for the year ended December 31, 2016 was R$47.2 million, an increase of R$32.8 million, or 227.7%, from R$14.4 million for the year ended December 31, 2015. This increase was primarily attributable to the increase in the fair value of our derivative financial instruments, comprised of the put and call options of our business acquisitions and investments in associates and joint ventures.

 

Finance costs. Finance costs for the year ended December 31, 2016 was R$1.8 million, a decrease of R$1.3 million, or 41.8%, from R$3.1 million for the year ended December 31, 2015.

 

Profit before income taxes

 

For the reasons discussed above, profit before income taxes for the year ended December 31, 2016 was R$92.8 million, an increase of R$40.6 million, or 77.6%, from R$52.3 million for the year ended December 31, 2015.

 

Income taxes - income (expense)

 

Income taxes - income (expense) for the year ended December 31, 2016 was R$18.4 million, an increase of R$10.1 million, or 121.2%, from R$8.3 million for the year ended December 31, 2015. This increase was primarily attributable to the growth in our net revenues as a result of the positive impact of our organic growth through the addition of new partner schools and an increase in up-sales of our solutions during the period.

 

Profit for the year

 

As a result of the foregoing, profit for the year ended December 31, 2016 was R$74.4 million, an increase of R$30.5 million, or 69.4%, from R$43.9 million for the year ended December 31, 2015.

 

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Quarterly Financial Data (Unaudited) and Other Information

 

The following tables set forth certain of our financial information for the periods indicated:

 

   Three Months Ended
   March  31,
2017
  June  30,
2017
  September 30,
2017
  December 31,
2017
  March  31,
2018
  June  30,
2018
   (Unaudited) (in millions of reais)
Statement of Income Data                  
Net revenue    83.0    53.1    38.4    69.9    113.6    81.4 
Costs of sales    (20.0)   (14.3)   (6.1)   (18.1)   (25.8)   (16.9)
Gross profit    63.0    38.8    32.3    51.8    87.8    64.6 
Selling expenses    (12.4)   (16.7)   (16.4)   (19.7)   (24.3)   (24.1)
General and administrative expenses    (9.5)   (10.2)   (11.2)   (18.0)   (13.7)   (17.0)
Other income (expenses), net    2.5    (1.3)   0.5    1.6    3.7    (1.5)
Operating profit    43.5    10.6    5.2    15.6    53.4    22.0 
Finance income    4.5    3.4    4.4    0.2    3.7    3.6 
Finance costs    (3.5)   (4.4)   (9.0)   (3.5)   (3.9)   (3.8)
Finance result    1.0    (1.0)   (4.6)   (3.3)   (0.2)   (0.3)
Share of loss of equity-accounted investees    (0.4)   (0.1)   (0.1)   0.0    (0.1)   (0.3)
Profit before income taxes    44.1    9.4    0.5    12.3    53.2    21.5 
Income taxes – income (expense)    (12.7)   (4.6)   (1.2)   (4.3)   (12.8)   (7.6)
Current    (11.8)   (6.4)   (4.6)   (8.3)   (14.8)   (6.1)
Deferred    (0.9)   1.8    3.4    4.0    2.0    (1.5)
Profit for the period / year    31.4    4.8    (0.7)   8.1    40.4    13.9 
Profit (loss) attributable to:                              
Equity holders of the parent    31.5    5.1    (0.3)   8.0    40.5    14.1 
Non-controlling interests    (0.1)   (0.3)   (0.3)   0.1    (0.1)   (0.2)
                               
                               
   Three Months Ended
   March  31,
2017
  June  30,
2017
  September 30,
2017
  December 31,
2017
  March  31,
2018
  June  30,
2018
   (Unaudited) (as a percentage of net revenue)
Statement of Income Data                  
Net revenue    100%   100%   100%   100%   100%   100%
Costs of sales    24%   27%   16%   26%   23%   21%
Gross profit    76%   73%   84%   74%   77%   79%
                               
Selling expenses    15%   32%   43%   28%   21%   30%
General and administrative expenses    11%   19%   29%   26%   12%   21%
Other income (expenses), net    3%   2%   1%   2%   3%   2%
Operating profit    52%   20%   13%   22%   47%   27%
Finance income    5%   6%   11%   0%   3%   4%
Finance costs    4%   8%   23%   5%   3%   5%
Finance result    1%   2%   12%   5%   0%   0%
Share of loss of equity-accounted investees    1%   0%   0%   0%   0%   0%
Profit before income taxes    53%   18%   1%   18%   47%   26%
Income taxes – income (expense)    15%   9%   3%   6%   11%   9%
Current    14%   12%   12%   12%   13%   7%
Deferred    1%   3%   9%   6%   2%   2%
Profit for the period / year    38%   9%   2%   12%   36%   17%
Profit (loss) attributable to:                              
Equity holders of the parent    38%   10%   1%   11%   36%   17%
Non-controlling interests    0%   0%   1%   0%   0%   0%

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Liquidity and Capital Resources

 

As of June 30, 2018, we had R$5.6 million in cash and cash equivalents and financial investments. 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.

 

Cash Flows

 

   For the Six Months Ended June 30,  For the Year Ended December 31,
   2018  2017  2017  2016  2015
   (in thousands of reais)  (in thousands of reais)
Cash Flow Data               
Net cash flows from operating activities    77,279    75,241    62,650    41,237    24,371 
Net cash flows from (used in) investing activities    12,581    (76,702)   (77,269)   (24,921)   (36,619)
Net cash flows (used in) from financing activities    (85,050)   -    11,095    (12,641)   4,826 

 

Operating Activities

 

Our net cash flows from operating activities increased (i) by 69.2% from R$24.4 million in 2015 to R$41.2 million in 2016, (ii) by 51.9% from R$41.2 million in 2016 to R$62.7 million in 2017 and (iii) by 2.7% from R$75.2 million in the six months ended June 30, 2017 to R$77.3 million during the six months ended June 30, 2018. Our net cash flows from operating activities were significantly affected by the companies we acquired and the positive impact of our organic growth through the addition of new partner schools and an increase in up-sales of our solutions during the period, which was partially offset by increases in payments to suppliers and personnel expenses.

 

Investing Activities

 

Our net cash flows from investing activities changed from net cash used in investing activities of R$76.7 million in the six months ended June 30, 2017, to net cash from investing activities of R$12.6 million in the six months ended June 30, 2018, primarily due to the R$33.5 million decrease in financial investments used mainly in the payment of dividends in the six months ended June 30, 2018, compared a R$60.2 million increase in investments in financial investments in the six months ended June 30, 2017.

 

Our net cash flows used in investing activities increased from R$24.9 million of net cash flows used in investing activities in 2016, to R$77.3 million of net cash flows used in investing activities in 2017, primarily due to the R$29.0 million we paid to acquire NS Educação Ltda. on September 28, 2017, the R$8.0 million we paid to acquire an interest in Geekie in 2017, the R$17.4 million applied in financial investments in 2017, and the R$5.3 million in property and equipment expenditures in 2017.

 

Our net cash flows used in investing activities decreased from R$36.6 million of net cash flows used in investing activities in 2015, to R$24.9 million of net cash flows used in investing activities in 2016, primarily due to the R$33.0 million we paid to acquire a controlling interest in SAE on June 27, 2016, which was offset by the increase in proceeds from financial investments in 2016.

 

Financing Activities

 

Our net cash flows (used in) from financing activities in the six months ended June 30, 2018 was R$85.1 million of net cash flows used in financing activities, compared to no net cash flows from financing activities in the six months ended June 30, 2017, primarily due to a dividend payment of R$85.1 million in the six months ended June 30, 2018.

 

Our net cash flows (used in) from financing activities in 2016 was R$12.6 million of net cash flows used in financing activities, compared to R$11.1 million of net cash flows from financing activities in 2017, primarily due to a capital increase of R$86.1 million in 2017, which was partially offset by a dividend payment of R$75.1 million in 2017.

 

Our net cash flows (used in) from financing activities was R$4.8 million of net cash flows from financing activities in 2015, compared to R$12.6 million of net cash flows used in financing activities in 2016, primarily due to a dividend payment of R$13.5 million in 2016, a capital increase of R$10 million in 2015 and a non-controlling interest increase of R$0.8 million in 2016.

 

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Indebtedness

 

As of June 30, 2018 and as of December 31, 2017, we had no outstanding indebtedness.

 

Capital Expenditures

 

In the six months ended June 30, 2018 and the years ended December 31, 2017, 2016 and 2015 we made capital expenditures of R$7.1 million, R$11.4 million, R$7.2 million and R$5.4 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 2017 as compared to 2016 and 2015 due to the purchase of a high volume of intangible assets comprising educational material.

 

We estimate that our capital expenditures for 2018 will be approximately R$11.9 million, primarily for updates of our educational content and technological enhancements to our platform. Our actual capital expenditures may vary from the related amounts we have budgeted, both in terms of the aggregate capital expenditures we incur and when we incur them.

 

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, our existing cash and cash equivalents, and with the net proceeds of this offering. 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.

 

Tabular Disclosure of Contractual Obligations

 

The following is a summary of our contractual obligations as of June 30, 2018 and as of December 31, 2017:

 

   Payments Due By Period as of June 30, 2018
    Less than
1 year
  1-3 years  3-5 years  More than
5 years
  Total
   (in thousands of reais)
Trade payables    5,492    -    -    -    5,492 
Operating leases    4,048    5,651    3,748    2,519    15,966 
Financial instruments from acquisition of interests(1)    2,051    1,184    10,210    -    13,445 
Accounts payable to selling shareholders    908    42,191    5,136    -    48,235 
Total    12,499    49,026    19,094    2,519    83,138 

 
(1)Includes (i) an option to acquire the remaining 93.46% of the outstanding share capital of Geekie in May 2022 pursuant to the share purchase agreement dated as of December 8, 2016, as part of our acquisition of our current 6.54% interest in the share capital of Geekie, and (ii) an option to acquire the remaining 75% of the outstanding share capital of WPensar between July 10, 2020 and July 10, 2021.

 

   Payments Due By Period as of December 31, 2017
   Less than
1 year
  1-3 years  3-5 years  More than
5 years
  Total
    (in thousands of reais)
Trade payables    3,918    -    -    -    3,918 
Operating leases    4,203    6,386    3,959    3,160    17,708 
Financial instruments from acquisition of interests(1)    1,784    1,825    10,028    -    13,637 
Accounts payable to selling shareholders    14,936    15,298    27,769    -    58,003 
Total    24,841    23,509    41,756    3,160    93,266 
 
(1)Includes (i) an option to acquire the remaining 93.46% of the outstanding share capital of Geekie in May 2022 pursuant to the share purchase agreement dated as of December 8, 2016, as part of our acquisition of our current 6.54% interest in the share capital of Geekie, and (ii) an option to acquire the remaining 75% of the outstanding share capital of WPensar between July 10, 2020 and July 10, 2021.

 

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Off-Balance Sheet Arrangements

 

As of June 30, 2018 and as of December 31, 2017, we did not have any off-balance sheet arrangements.

 

Critical Accounting Estimates and Judgments

 

Our consolidated financial statements are prepared in conformity with IFRS. In preparing our audited consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments and estimates. Our significant accounting policies are described in note 3 to the audited consolidated financial statements of EAS Brazil included elsewhere in this prospectus. We believe that the following critical accounting policies are more affected by the significant judgments and estimates used in the preparation of our consolidated financial statements:

 

Impairment of Non-Financial Assets

 

Impairment exists when the carrying value of an asset or cash generating unit (“CGU”) or a group of CGUs 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 we have 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. These estimates are most relevant to goodwill that is recognized by us. The key assumptions used to determine the recoverable amount for the different CGUs, including a sensitivity analysis, are disclosed and further explained in note 13 to the audited consolidated financial statements of EAS Brazil included elsewhere in this prospectus.

 

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. Further details on taxes are disclosed in note 22 to the audited consolidated financial statements and note 20 to the unaudited interim condensed consolidated financial statements of EAS Brazil included elsewhere in this prospectus.

 

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 24 to the audited consolidated financial statements and note 22 to the unaudited interim condensed consolidated financial statements of EAS Brazil included elsewhere in this prospectus for further information.

 

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 take into consideration the probability of meeting each performance target and the discount factor. Any contingent consideration is classified as financial instruments from acquisition of interests. For further information, see notes 4, 14 and 24 to the audited consolidated financial statements and notes 12 and 22 to the unaudited interim condensed consolidated financial statements of EAS Brazil included elsewhere in this prospectus.

 

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Recent Accounting Pronouncements

 

New standards, interpretations and amendments adopted in 2018

 

We started applying IFRS 9 – Financial Instruments and IFRS 15 – Revenue from Contracts with Customers, beginning on January 1, 2018. For further information, see note 2.2 to the unaudited interim condensed consolidated financial statements of EAS Brazil included elsewhere in this prospectus. Other amendments and interpretations were applied for the first time in 2018, but do not have an impact on the unaudited interim condensed consolidated financial statements of EAS Brazil.

 

IFRS 9 - Financial Instruments

 

The IASB issued IFRS 9 relating to the classification and measurement of financial instruments. IFRS 9 uses a single approach to determine whether a financial asset is measured at amortized cost or fair value, and this approach replaces the previous requirements of IAS 39. The approach in IFRS 9 is based on how an entity manages its financial assets (i.e., its business model) and the contractual cash flow characteristics of those financial assets. IFRS 9 also amends the impairment criteria by introducing a new expected credit losses model for calculating impairment on financial assets and commitments to extend credit. Further, IFRS 9 includes new hedge accounting requirements that align hedge accounting more closely with risk management. These new requirements do not fundamentally change the types of hedging relationships or the requirement to measure and recognize ineffectiveness but do allow more hedging strategies that are used for risk management to qualify for hedge accounting and for more judgment by management in assessing the effectiveness of those hedging relationships. Extended disclosures in respect of risk management activity for those choosing to apply the new hedge accounting requirements will also be required under the new standard.

 

We adopted IFRS 9 prospectively, with the initial application date of January 1, 2018. The adoption of the expected credit loss requirements of IFRS 9 resulted in an increase in impairment allowances of the trade receivables. The increase in allowances resulted in an adjustment to retained earnings as of January 1, 2018 of R$4.3 million, net of tax effects.

 

For further information, see note 2.2 to the unaudited interim condensed consolidated financial statements of EAS Brazil included elsewhere in this prospectus.

 

IFRS 15 - Revenue from Contracts with Customers

 

IFRS 15 was issued in May 2014, and amended in April 2016. IFRS 15 affects any entity entering into contracts with customers, unless those contracts fall within the scope of other standards such as insurance contracts, financial instruments or lease contracts. IFRS 15 supersedes the revenue recognition requirements in IAS 18, Revenue, IFRIC 13, Customer Loyalty Programmes, and the majority of other industry-specific guidance. The standard contains a single model that applies to contracts with customers and two approaches to recognizing revenue: at a point in time or over time. The model features a contract-based five-step analysis of transactions to determine whether, how much and when revenue is recognized. New estimates and judgmental thresholds have been introduced, which may affect the amount or timing of revenue recognized.

 

We adopted IFRS 15 as of January 1, 2018 using the modified retrospective method and the effects of adopting IFRS 15 are not material. For further information, see note 2.2 to the unaudited interim condensed consolidated financial statements of EAS Brazil included elsewhere in this prospectus.

 

Standards, interpretations and amendments not adopted yet

 

Certain IFRS standards and interpretations that have been issued but that will not be in effect until January 1, 2019 could impact the presentation of our financial position or performance once they are effective. For further information on the impact of these IFRS standards and interpretations on the presentation of our financial position or performance once they become effective, see note 2 to the audited consolidated financial statements and the unaudited interim condensed consolidated financial statements of EAS Brazil included elsewhere in this prospectus.

 

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IFRS 16 - Leases

 

The IASB recently issued IFRS 16 to replace IAS 17 “Leases.” This standard introduces a single lessee accounting model and requires a lessee to recognize assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value. A lessee is required to recognize a right-of-use asset representing its right to use the underlying asset and a lease liability representing its obligation to make lease payments. This standard substantially carries forward the lessor accounting requirements of IAS 17, while requiring enhanced disclosures to be provided by lessors.

 

We will adopt IFRS 16 from its effective date of January 1, 2019. We are currently evaluating the impact of this standard, and do not anticipate applying it prior to its effective date.

 

JOBS Act

 

We are an emerging growth company under the JOBS Act. The JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.

 

Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company”, we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our initial public offering or until we are no longer an “emerging growth company,” whichever is earlier.

 

Quantitative and Qualitative Disclosure About Market Risk

 

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

 

EAS’s results are not subject to significant fluctuations resulting from the effects of the volatility of any exchange rate.

 

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 and cash equivalents and financial investments indexed to the CDI totaled R$55.4 million and R$83.8 million as of June 30, 2018 and December 31, 2017, respectively. See note 23 to the unaudited interim condensed consolidated financial statements and note 25 to the annual audited consolidated financial statements of EAS Brazil included elsewhere in this prospectus 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 June 30, 2018 and December 31, 2017.

 

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Industry Overview

 

Introduction to Brazil’s Education System

 

Brazil’s education system consists of two main segments: K-12 education and higher education. K-12 education can be further sub-divided as follows: (a) formal education, which comprises fundamental education programs (early childhood education, primary education and secondary education, and potentially education programs for young adults (EJA) and for the disabled, as well as vocational and technical education programs), in which students are issued official certificates or diplomas from the relevant governmental education regulators upon completion of the relevant education programs; and (b) supplementary education, which complements formal education and comprises a variety of training and learning programs, such as language courses.

 

The diagram below illustrates the main features of the Brazilian education system:

 

K-12 and Higher Education Systems Diagram

 

 

 

Source: MEC. This graph does not include education programs for young adults or EJA (Educação de Jovens e Adultos), technical and professional education.

 

The K-12 segment is the largest within the Brazilian education industry. In 2017, it consisted of 43.8 million enrolled students, representing approximately one-quarter of Brazil’s total population and approximately 84% of the total number of students enrolled in the formal education system, according to the MEC. When compared to higher education, the K-12 segment has a significantly longer educational cycle, with over five times as many enrolled students and a more resilient student base, given early childhood and primary education are compulsory for students aged 4 to 17.

 

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Number of enrolled students per education phase (in millions, 2017)

 

 

 

Source: MEC and INEP, which is the agency connected to the MEC that is in charge of evaluating educational systems and the quality of education in Brazil. Higher education (undergraduate) numbers are from 2016, which is the most recent data available.

 

The dynamics of undergraduate admissions programs in Brazil contribute significantly to creating a persistent demand for high quality K-12 education. Unlike in the United States, the most prestigious universities in Brazil are public institutions. Since these public universities do not charge tuition and available spots are limited, admission is highly competitive, resulting in a high and continuous demand for quality K-12 education to prepare students for admission into these public universities.

 

As opposed to the higher education segment, high quality basic education in Brazil is largely associated with private institutions. Though K-12 education is offered in both private and public institutions, the quality of public K-12 schools in Brazil is generally regarded as poor, due in part to a severe lack of public funding that has resulted in an insufficient number of teachers, overcrowded classrooms and inadequate facilities, infrastructure and security.

 

Over the past few years, the combination of (i) high demand for quality K-12 education, (ii) the inability of the Brazilian government to meet such demand and (iii) a friendly regulatory environment, has created an opportunity for for-profit private education institutions to expand their businesses. Although public schools still account for the majority of students in K-12 education in Brazil, there has been a significant departure from this trend.

 

Fundamentals of K-12 Education in Brazil

 

We believe the following factors have contributed to, and are expected to continue to fuel, the expansion of private K-12 education in Brazil:

 

Critical mass of students, especially in early years of the cycle. With a large addressable market of 43.8 million students, Brazil has the largest K-12 student population in Latin America and one of the largest in the world, ranking fifth behind India, China, Indonesia and the United States, all of which have larger general populations, according to UNESCO and INEP data. The majority of K-12 students in Brazil are concentrated in the early years of the cycle, with early childhood and primary education accounting for approximately 82% of student enrollments in 2017.

 

Limited regulatory requirements. Schools in Brazil are afforded latitude to organize their educational framework in several ways, cycles, periods and groups, so long as the selected framework addresses the overall goals of the learning process as set forth in the Education Law (“Lei das Diretrizes” and “Bases da Educação Nacional”), which regulates the basic national curriculum, coursework volume, class attendance standards and grade promotion requirements.

 

Reduced exposure to government policies. Unlike higher education, which has recently been heavily impacted by government policies such as the Student Financing Fund (FIES) and the ProUni (University for All Program), which promote the inclusion of lower socioeconomic classes, there have been no such policies pertaining to K-12 education. Instead, this segment has been able to grow organically without the need for significant funding from Brazilian government programs.

 

Resilient market, with low drop-out and default rates. We believe the K-12 segment has proven to be highly resilient to macroeconomic downturns over the years primarily because it is mandatory, which helps produce lower dropout rates among K-12 than higher education students. In addition, K-12 students enrolled in private schools usually come from higher income families with the means to prioritize and invest in education. According to data from the National Confederation of Shopkeepers (CNDL) (“Confederação Nacional de Dirigentes Lojistas”), in 2015, the private K-12 education segment accounted for only 15% of payment defaults in education, as measured by

 

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the Education Delinquency Index (“Indicador de Inadimplência na Educação”), which is almost three times lower than payment default rates in higher education during the same period.

 

Lack of professionalization. Private K-12 education in Brazil is still highly fragmented, with over 40,000 private schools across the country, most of which are small-scale, family-owned institutions with less than 1,000 enrolled students. In our view, there is a significant gap for professionalization of this market, which is comprised of only a handful of large education service providers that are only undertaking minimal consolidation opportunities.

 

Flight to Quality: The Expansion of the Private K-12 Market in Brazil

 

The Competitive Path to University Admissions

 

The wage benefits of earning higher education degrees in Brazil are very attractive, which creates a constant demand for university degrees, especially for those from high-quality public institutions. The relative earnings of a Brazilian with a tecnologica, licenciatura or bacharelado degree or above is about 3.5x higher than what a secondary education drop-out earns. This is a considerable gap when compared, for example, to the United States, where the same gap is approximately 2.2x, according to a 2015 UNESCO survey. Since public universities in Brazil are typically of better quality than private universities and also tuition free, students in Brazil tend to apply to public institutions.

 

Relative Earnings from Employment among 25-34 Year-olds (by level of educational attainment, 2015)

 

 

 

Source: UNESCO.

 

In recent years, competition for admission into public universities has increased, a trend driven both by greater student demand and a decrease in the number of available places. In 2012, there were, on average, 11 applicants per available seat in public universities, as compared to 14 applicants in 2016, according to INEP. Furthermore, the number of public university seats decreased by 6.3% from 2012 to 2016, compared to an 80% increase in the number of private school seats during the same period. This is mainly due to government policies such as FIES and ProUni, which promote the inclusion of students from lower socioeconomic classes in higher education.

 

The Importance of the ENEM (The “Brazilian Gaokao”)

 

The ENEM is an optional national standardized exam taken by Brazilian high school students, which has become increasingly more important for entry into public higher education institutions. The ENEM is the most important national exam in Brazil and functions as an entrance exam to universities, similar to China’s Gaokao. As admission into higher education became increasingly competitive, the need for a standardized and unified method for evaluating students became apparent. In 2016, the ENEM results served as admissions test results for approximately 50% of Brazilian public higher education institutions, which represents an increase of 104.5% compared to 2012.

 

Private vs. Public K-12 Education in Brazil: Understanding the Quality Gap

 

Brazil