UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16
OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of May, 2019

 

 Commission File Number: 001-38673

 

Arco Platform Ltd.

(Exact name of registrant as specified in its charter)

 

Rua Augusta 2840, 9th floor, suite 91

Consolação, São Paulo – SP

01412-100, Brazil

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

 

Form 20-F

x

  Form 40-F o

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

 

Yes o   No

x

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

 

Yes o   No

x

 

 

 

 

 

TABLE OF CONTENTS

 

ITEM  
1. Unaudited Interim Condensed Consolidated Financial Statements as of and for the three months ended March 31, 2019
   

 

 

 

 

Arco Platform Limited

 

Unaudited interim condensed

consolidated financial statements

 

March 31, 2019

 

 

 

Arco Platform Limited

 

Unaudited interim condensed consolidated statements of financial position

As of March 31, 2019 and December 31, 2018 

(In thousands of Brazilian reais)

 

   Notes 

March 31,

2019

  December 31,
2018
Assets     (unaudited)   
Current assets         
Cash and cash equivalents  3   4,357    12,301 
Financial investments  4   832,956    806,789 
Trade receivables  5   151,159    136,611 
Inventories  6   13,768    15,131 
Taxes recoverable  7   16,770    11,227 
Other assets      4,665    6,091 
Total current assets      1,023,675    988,150 
              
Non current assets             
Financial instruments from acquisition of interests  13   21,261    26,630 
Deferred income tax  21   112,647    99,460 
Taxes recoverable  7   1,033    1,033 
Financial investments  4   4,421    4,370 
Loans to related parties  8   15,378    1,226 
Other assets      4,812    1,060 
Investments and interests in other entities  9   11,370    11,862 
Property and equipment  10   13,738    13,347 
Right-of-use assets  11   18,403    - 
Intangible assets  12   178,339    187,740 
Total non current assets      381,402    346,728 
              
Total assets      1,405,077    1,334,878 
              
Liabilities         
Current liabilities             
Trade payables      13,970    14,845 
Labor and social obligations      20,513    15,888 
Advances from customers      26,332    5,997 
Lease liabilities  11   4,232    - 
Taxes and contributions payable      1,922    2,555 
Income taxes payable      18,134    17,294 
Financial instruments from acquisition of interests  13   -    51 
Accounts payable to selling shareholders  14   841    830 
Other liabilities      127    428 
Total current liabilities      86,071    57,888 
Non current liabilities             
Financial instruments from acquisition of interests  13   21,594    25,046 
Lease liabilities  11   17,410    - 
Provision for legal proceedings  25   210    131 
Deferred income tax  21   1,167    1,378 
Accounts payable to selling shareholders  14   187,201    180,551 
Total non current liabilities      227,582    207,106 
Total liabilities      313,653    264,994 
              
Equity             
Share capital  16   10    10 
Capital reserve      1,081,261    1,089,505 
Share-based compensation reserve      67,487    67,350 
Accumulated losses      (57,334)   (86,687)
Equity attributable to equity holders of the parent      1,091,424    1,070,178 
Non-controlling interests      -    (294)
Total equity      1,091,424    1,069,884 
              
Total liabilities and equity      1,405,077    1,334,878 

 

The accompanying notes are part of the unaudited interim condensed consolidated financial statements.

 

F-2

 

Arco Platform Limited

 

Unaudited interim condensed consolidated statements of income and comprehensive income

For the three-month periods ended March 31, 2019 and 2018 

(In thousands of Brazilian reais, except earnings per share)

 

   Notes  March 31, 2019  March 31, 2018
      (unaudited)  (unaudited)
          
Net revenue  18   117,055    113,634 
Cost of sales  19   (21,869)   (25,840)
              
Gross profit      95,186    87,794 
              
Selling expenses  19   (36,135)   (24,312)
General and administrative expenses  19   (20,832)   (13,695)
Other income, net      3,359    3,648 
              
Operating profit      41,578    53,435 
              
Finance income  20   16,956    3,709 
Finance costs  20   (16,481)   (3,925)
Finance result  20   475    (216)
              
Share of loss of equity-accounted investees  9   (492)   (65)
              
Profit before income taxes      41,561    53,154 
 Income taxes - income (expense)             
 Current      (18,252)   (14,808)
 Deferred      7,532    2,045 
   21   (10,720)   (12,763)
              
Profit for the period      30,841    40,391 
              
Other comprehensive income for the period      -    - 
Total comprehensive income for the period      30,841    40,391 
              
Profit attributable to             
Equity holders of the parent      30,841    40,539 
Non-controlling interests      -    (148)
              
Basic earnings per share - in Brazilian reais  17          
Class A      0.61    0.81 
Class B      0.61    0.81 
Diluted earnings per share - in Brazilian reais  17          
Class A      0.59    0.77 
Class B      0.59    0.78 

 

The accompanying notes are part of the unaudited interim condensed consolidated financial statements.

 

F-3

 

Arco Platform Limited

 

Unaudited interim condensed consolidated statements of changes in equity

For the three-month periods ended March 31, 2019 and 2018 

(In thousands of Brazilian reais, unless otherwise stated)

 

   Attributable to equity holders of the parent      
         Earnings reserves               
   Share capital  Capital reserve  Legal reserve  Retained earnings reserve  Share-based compensation reserve  Retained earnings  Total  Non-controlling interests  Total equity
                            
Balances at December 31, 2017   55,897    160,682    8,165    73,827    7,053    -    305,624    111    305,735 
Change in accounting policy (IFRS 9)   -    -    -    -    -    (4,307)   (4,307)   -    (4,307)
Profit for the period   -    -    -    -    -    40,539    40,539    (148)   40,391 
Total comprehensive income   -    -    -    -    -    40,539    40,539    (148)   40,391 
Impact from equity transactions of non-controlling interests   -    -    -    -    -    -    -    78    78 
Share-based compensation plan   -    -    -    -    343    -    343    -    343 
Balances at March 31, 2018 (unaudited)   55,897    160,682    8,165    73,827    7,396    36,232    342,199    41    342,240 

F-4

 

   Attributable to equity holders of the parent      
   Share capital  Capital reserve  Share-based compensation reserve  Accumulated losses  Total  Non-controlling interests  Total equity
                      
Balances at December 31, 2018   10    1,089,505    67,350    (86,687)   1,070,178    (294)   1,069,884 
Change in accounting policy – IFRS 16 (Note 2.3)   -    -    -    (1,488)   (1,488)   -    (1,488)
                                    
Profit for the period   -    -    -    30,841    30,841    -    30,841 
Total comprehensive income   -    -    -    30,841    30,841    -    30,841 
Shares issued – stock option plan (Note 15)   -    1,218    -    -    1,218    -    1,218 
Corporate restructuring (Note 2.2)   -    (9,462)   -    -    (9,462)   -    (9,462)
Non-controlling interest   -    -    -    -    -    294    294 
Share-based compensation plan - International School   -    -    137    -    137    -    137 
                                    
Balances at March 31, 2019 (unaudited)   10    1,081,261    67,487    (57,334)   1,091,424    -    1,091,424 
                                    

The accompanying notes are part of the unaudited interim condensed consolidated financial statements.

 

F-5

 

Arco Platform Limited

 

Unaudited interim condensed consolidated statements of cash flows

For the three-month periods ended March 31, 2019 and 2018 

(In thousands of Brazilian reais)

 

   March 31, 2019  March 31, 2018
   (unaudited)  (unaudited)
Operating activities      
Profit before income taxes for the period   41,561    53,154 
Adjustments to reconcile profit before income taxes          
Depreciation and amortization   7,240    4,374 
Inventory reserves   2,228    2,096 
Allowance for doubtful accounts   1,653    3,534 
Residual value of property and equipment and intangible assets disposed   102    138 
Changes in fair value of derivative instruments   1,866    (1,607)
Share of loss of equity-accounted investees   492    65 
Share-based compensation plan   137    343 
Accrued interest   5,942    2,080 
Interest in lease liabilities   395    - 
Provision for legal proceedings   79    - 
Foreign exchange income   (76)   - 
Alienation of investment   (3,288)   - 
Changes in assets and liabilities          
Trade receivables   (16,201)   (15,862)
Inventories   36    2,279 
Taxes recoverable   (4,972)   (883)
Other assets   1,952    (294)
Trade payables   686    (592)
Labor and social obligations   4,774    300 
Taxes and contributions payable   (572)   284 
Advances from customers   20,828    3,007 
Other liabilities   (301)   (1,848)
           
Cash generated from operations   64,561    50,568 
           
Income taxes paid   (18,035)   (16,340)
Net cash flows from operating activities   46,526    34,228 
           
Investing activities          
Acquisition of property and equipment   (2,793)   (930)
Acquisition of subsidiaries, net of cash acquired   -    (8,045)
Acquisition of intangible assets   (11,492)   (1,855)
Financial investments   (26,291)   (20,286)
Loans to related parties   (14,000)   - 
Net cash flows used in investing activities   (54,576)   (31,116)
           

Financing activities

          
Capital increase   1,218    - 
Share issuance costs   (673)   - 
Payment of lease liabilities   (515)   - 
Net cash flows from financing activities   30    - 
           
Foreign exchange effects on cash and cash equivalents   76    - 
           
Increase (decrease) in cash and cash equivalents   (7,944)   3,112 
           
Cash and cash equivalents at the beginning of the period   12,301    834 
Cash and cash equivalents at the end of the period   4,357    3,946 
Increase (decrease) in cash and cash equivalents   (7,944)   3,112 

 

The accompanying notes are part of the unaudited interim condensed consolidated financial statements.

 

F-6

 

Notes to the unaudited interim condensed consolidated financial statements

 

Expressed in thousands of Brazilian reais, unless otherwise stated

 

1Corporate information

 

Arco Platform Limited (“Arco”) and its subsidiaries (collectively, the “Company”) is a holding company incorporated under the laws of the Cayman Islands on April 12, 2018. Arco became the parent company of Arco Educação S.A. (“Arco Brazil”) through the completion of the corporate reorganization described below.

 

Arco Brazil is the holding company of the operating subsidiaries, including EAS Educação S.A. (“EAS”), which provides educational content from basic to secondary education (“K-12 curriculum”). Since 2015, the Company has been investing in technology and its printed methodology evolved to an educational platform, capable of delivering the entire K-12 curriculum content.

 

The Company offers a complete pedagogical methodology using technology features to deliver educational content to improve the learning process. The Company’s activities also comprise the editing, publishing, advertising and sale of educational content for private schools.

 

These unaudited interim condensed consolidated financial statements were authorized for issue by the Board of Directors on May 17, 2019.

 

Corporate reorganization and initial public offering

 

On February 19, 2018, the Company’s controlling shareholder SASPAR was merged by GA Holding, streamlining the shareholding structure and the resulting entity was Arco Brazil. As a result of this transaction, EAS became a wholly owned subsidiary of Arco Brazil and the shareholders of GA Holding and SASPAR became shareholders of Arco Brazil with the same percentage ownerships they held in EAS prior to the reorganization.

 

On April 12, 2018, Arco was incorporated in the Cayman Islands, for the purposes of its initial public offering (“IPO”). At the time of the incorporation, the Founding Shareholders (through OSC Investments Ltd. and ASCN Investments Ltd., both based in Cayman Islands) and General Atlantic Arco (Bermuda) L.P. (“GA Entity”) held 7,476,705 shares of Arco Brazil, which were all of the shares of Arco Brazil, and Arco Brazil holds all the shares of EAS, the principal operating company.

 

On September 14, 2018, the Founding Shareholders and the GA Entity contributed all of their shares in Arco Brazil to Arco. In return for this contribution, Arco issued 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 Arco.

 

On September 14, 2018, the director Alberto Menache and his spouse, Fabiana Menache, through Alfaco Holding Inc. (“Alfaco”), a company incorporated in the British Virgin Islands, and the shares of which Mr. and Mrs. Menache own 100%, purchased 99,725 Class A common shares of Arco, at a price equal to R$ 31.00 per share.

 

F-7

 

On September 28, 2018, Arco concluded its IPO of 12,777,777 Class A common shares (including pursuant to the exercise in full by the underwriters of their over-allotment option for 1,666,666 shares). The initial offer price was US$ 17.50 (R$ 71.00) per share. The shares are publicly traded on Nasdaq Global Select Market since September 25, 2018 under the symbol "ARCE”. The IPO proceeds including the exercise of the over-allotment option, amounted to approximately US$ 223,611 (R$ 895,182) and the share issuance costs totaled R$ 79,205.

 

2Significant accounting policies

 

2.1Basis for preparation of the unaudited interim condensed consolidated financial statements

 

The unaudited interim condensed consolidated financial statements as of March 31, 2019 and for the three-month periods ended March 31, 2019 and 2018 have been prepared in accordance with IAS 34 - Interim Financial Reporting.

 

The unaudited interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Company’s annual consolidated financial statements as at December 31, 2018.

 

The unaudited interim consolidated financial statements are presented in Brazilian reais (“BRL” or “R$”), which is the Company’s functional and presentation currency. All amounts are rounded to the nearest thousand, except when otherwise indicated.

 

2.2Changes in the Company’s subsidiaries

 

During the three-month period ended March 31, 2019, the Company had the following changes in the corporate organization:

 

Novagaúcha Editora e Livraria Ltda. was merged by Barra Américas Editora Ltda. on March 31, 2019. The merger did not affect the consolidated financial statements.

 

On February 1, 2019 as a consequence of a corporate restructuring, EAS spin-off its investments in SAE Digital to a new holding company, which was subsequently merged by SAE Digital and its shares were issued to Arco Brazil. When EAS acquired SAE Digital, goodwill was treated as not deductible, however after this transaction SAE Digital has the tax benefit of the deductibility of the goodwill, which generates a future benefit and has recorded a deferred tax asset of R$ 5,135.

 

On January 2, 2019, the Company entered in an agreement to sell its shares on Escola de Aplicação São José dos Campos Ltda. to its minority shareholders, which is part of the Company’s Core segment. The transaction price of R$ 3,741 will be received in 16 quarterly installments from January 2022 to October 2025, adjusted by the IGP-M (Brazilian general market price index issued by the FGV – “Fundação Getúlio Vargas”).

 

F-8

 

2.3Changes in accounting policies and disclosures

 

New standards, interpretations and amendments adopted by the Company

 

The accounting policies adopted in the preparation of the unaudited interim condensed consolidated financial statements are consistent with those followed in the preparation of the Company’s consolidated financial statements for the year ended December 31, 2018, except for the adoption of new standards effective as of January 1, 2019. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

 

The Company applies, for the first time on January 1, 2019, IFRS 16 Leases. As required by IAS 34, the nature and effect of these changes are disclosed below.

 

Other amendments and interpretations apply for the first time in 2019, but do not have an impact on the unaudited interim condensed consolidated financial statements of the Company.

 

IFRS 16 - Leases

 

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model.

 

The Company adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of January 1, 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Company also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (‘short-term leases’), and lease contracts for which the underlying asset is of low value (‘low-value assets’).

 

The effect of adoption IFRS 16 as at January 1, 2019 is as follows:

 

Assets   
  Right-of-use assets   20,102 
  Deferred tax assets   731 
Total assets   20,833 
Liabilities     
  Lease liabilities   22,321 
Total liabilities   22,321 
Total adjustment on equity:     
  Retained earnings   (1,488)

F-9

 

a)Nature of the effect of adoption of IFRS16

 

The Company has lease contracts for properties. Before the adoption of IFRS 16, the Company classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease. The Company did not have finance leases as of December 31, 2018. In an operating lease, the leased property was not capitalized and the lease payments were recognized as rent expense in profit or loss on a straight-line basis over the lease term. Any prepaid rent and accrued rent were recognized under Other assets and Trade payables, respectively. Upon adoption of IFRS 16, the Company applied a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The standard provides specific transition requirements and practical expedients, which has been applied by the Company.

 

The Company recognized right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The right-of-use assets for most leases were recognized based on the carrying amount as if the standard had always been applied, apart from the use of incremental borrowing rate at the date of initial application. Lease liabilities were recognized based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application.

 

The Company also applied the available practical expedients wherein it:

 

üUsed an intrinsic discount rate, according to the characteristics for each lease;

üRelied on its assessment of whether leases are onerous immediately before the date of initial application;

üApplied the short-term leases exemptions to leases with lease term that ends within 12 months at the date of initial application;

üExcluded the initial direct costs from the measurement of the right-of-use asset at the date of initial application;

üUsed hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

 

Based on the foregoing, as at January 1, 2019:

 

üRight-of -use assets of R$ 20,102 were recognized and presented separately in the statement of financial position.

üLease liabilities of R$ 22,321 were recognized;

üDeferred tax assets increased by R$ 731 because of the deferred tax impact of the changes in assets and liabilities;

üThe net effect of these adjustments had been adjusted to accumulated losses (R$ 1,488).

 

The lease liabilities as at January 1, 2019 can be reconciled to the operating lease commitments as at December 31, 2018 as follows:

 

F-10

 

Operating lease commitments as at December 31, 2018   27,397 
Weighted average incremental borrowing rate as at January 1, 2019   7.35%
Discounted operating lease commitments at January 1, 2019   22,874 
Less:     
Commitments related to sale of Escola de Aplicação São José dos Campos Ltda.   (553)
Lease liabilities as at January 1, 2019   22,321 

 

b)Summary of new accounting policies

 

Set out below are the new accounting policies of the Company upon adoption of IFRS 16, which have been applied from the date of initial application:

 

üRight-of-use assets

 

The Company recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of use assets are subject to impairment.

 

üLease liabilities

 

At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognized as expense in the period on which the event or condition that triggers the payment occurs.

 

In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.

 

F-11

 

üShort-term leases and leases of low-value assets

 

The Company applies the short-term lease recognition exemption to its short-term leases of properties (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to

 

leases of office equipment that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.

 

üSignificant judgement in determining the lease term of contracts with renewal options

 

The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

 

The Company has the option, under some of its leases to lease the assets for additional terms. The Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).

 

IFRIC Interpretation 23 - Uncertainty over Income Tax Treatment

 

The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following:

 

• Whether an entity considers uncertain tax treatments separately

• The assumptions an entity makes about the examination of tax treatments by taxation authorities 

• How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates

• How an entity considers changes in facts and circumstances

 

An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty needs to be followed.

 

The Company applies significant judgement in identifying uncertainties over income tax treatments.

 

F-12

 

Upon adoption of the Interpretation, the Company considered whether it has any uncertain tax positions. The Company applied the interpretation and did not have significant impact on the unaudited interim condensed consolidated financial statements.

 

3Cash and cash equivalents

 

   March 31, 2019  December 31, 2018
   (unaudited)   
Cash and bank deposits   335    366 
Bank deposits in foreign currency (a)   3,359    3,615 
Cash equivalents (b)   663    8,320 
    4,357    12,301 

 

(a)Short-term deposits (mainly IPO proceeds) maintained in U.S. dollar.

 

(b)Cash equivalents correspond to financial investments in Bank Certificates of Deposit (“CDB”) of highly rated financial institutions. As of March 31, 2019, the average interest on these CDB are equivalent to 55.0% (December 31, 2018: 61.7%) of the Interbank Certificates of Deposit (“CDI”). These funds are available for immediate use and have insignificant risk of changes in value.

 

4Financial investments

 

   March 31, 2019  December 31, 2018
   (unaudited)   
Financial investments (a)   835,715    810,812 
Financial investments in foreign currency   1,312    - 
Other   350    347 
    837,377    811,159 
Current   832,956    806,789 
Non-current   4,421    4,370 

 

(a)Financial investments correspond to investments in funds managed by highly rated financial institutions. As of March 31, 2019, the average interest on these funds are equivalent to 99.6% (December 31, 2018: 100.9%) of the CDI.

 

F-13

 

5Trade receivables

 

   March 31, 2019  December 31, 2018
   (unaudited)   
From sales of educational content   164,056    146,114 
From related parties (Note 8)   1,845    3,916 
    165,901    150,030 
(-) Allowance for doubtful accounts   (14,742)   (13,419)
    151,159    136,611 

 

As of March 31, 2019, and December 31, 2018, the aging of trade receivables was as follows:

 

   March 31, 2019  December 31, 2018
   (unaudited)   
Neither past due nor impaired   130,748    127,387 
Past due   35,153    22,643 
           
1 to 60 days   21,519    8,931 
61 to 90 days   3,516    3,868 
91 to 120 days   3,481    1,978 
121 to 180 days   2,409    3,173 
More than 180 days   4,228    4,693 
    165,901    150,030 

 

The movement in the allowance for doubtful accounts for the three-month periods ended March 31, 2019 and 2018, was as follows:

 

   March 31, 2019  March 31, 2018
   (unaudited)  (unaudited)
Balance at beginning of the period   (13,419)   (4,533)
Change in accounting policy – IFRS 9   -    (5,757)
Additions   (1,653)   (3,534)
Receivables written off during the period as uncollectible   330    1,347 
Balance at end of period   (14,742)   (12,477)

F-14

 

6Inventories

 

  

March 31,

2019

  December 31, 2018
   (unaudited)   
Educational content   5,475    8,335 
Educational content in progress (a)   7,439    6,205 
Consumables and supplies   388    286 
Inventories held by third parties   466    305 
    13,768    15,131 

 

(a)Costs being incurred to develop educational content. These costs include incurred personnel costs and third parties’ services for editing educational content and related activities (graphic design, editing, proofreading and layout, among others).

 

Educational content is presented net of inventory reserve. The movement in the inventory reserve for the three-month periods ended March 31, 2019 and 2018 was as follows:

 

   March 31, 2019  March 31, 2018
   (unaudited)  (unaudited)
Balance at beginning of the period   (4,403)   (2,047)
Inventory reserve   (2,228)   (2,096)
Write-off of inventories against reserve   1,312    - 
Balance at end of the period   (5,319)   (4,143)

 

7Taxes recoverable

 

   March 31, 2019  December 31, 2018
   (unaudited)   
Withholding Income Tax (IRRF) on financial investments   6,996    5,291 
IRPJ and CSLL recoverable   9,395    5,520 
PIS and COFINS recoverable   1,192    1,223 
Other taxes recoverable   220    226 
    17,803    12,260 
Current   16,770    11,227 
Non current   1,033    1,033 

 

Withholding income tax (IRRF) will be utilized to offset federal taxes payable.

 

F-15

 

8Related parties

 

The table below summarizes the balances and transactions with related parties:

 

   March 31, 2019  December 31, 2018
Assets  (unaudited)   
Trade receivables      
Livraria ASC Ltda. and Educadora ASC Ltda. (a)   1,845    3,916 
    1,845    3,916 
           
Loans to related parties          
WPensar S.A. (b)   1,245    1,226 
Loans - Geekie (c)   4,037    - 
Debentures – Geekie (c)   10,096    - 
    15,378    1,226 

 

   March 31, 2019  March 31, 2018
Net revenue  (unaudited)  (unaudited)
Livraria ASC Ltda. and Educadora ASC Ltda. (a)   1,253    1,563 
           
Expenses          
ASC Empreendimentos Ltda. and OSC Empreendimentos Ltda. (d)   (2)   (5)

 

(a) SAS Desenvolvimento Educacional Ltda. and International School sell educational content to Livraria ASC Ltda. and Educadora ASC Ltda., entities under common control of the Company’s controlling shareholder. The transactions are priced based on contract price at the sales date.

 

(b) The amounts receivable from joint venture are monetarily indexed to the Brazilian Sistema Especial de Liquidação e Custódia (SELIC) interest rate and have due date in July 2020.

 

(c) On January 17, 2019, the Company entered into an agreement with its associated company Geekie Desenvolvimento de Softwares S.A. (“Geekie”) buying 100,000 debentures issued at same date at par value of R$ 100.00 (hundred reais) each, totaling R$ 10,000. The debentures are due in June 2022 and bear interest of 110% of the CDI. The debentures are convertible at the option of Arco on maturity at the same mechanics of the call and put options presented in the investment agreement, as described in Note 9.

 

On the same date, the Company lent R$ 4,000 to Geekie Partners S.A., the controlling shareholder of Geekie, through a loan agreement with payment in June 2022, interest of 110% of the CDI, and with their entire interest on Geekie’s shares as collateral to the transaction.

 

The transactions totaled R$ 14,000 and has the purpose to support Geekie’s working capital needs.

 

F-16

 

(d) SAS Sistema de Ensino Ltda. had leased a facility from ASC Empreendimentos Ltda., which agreement was terminated in June 2018; SAS Livrarias Ltda. had leased a facility from OSC Empreendimentos Ltda., which agreement was also terminated in June 2018; and SAS Desenvolvimento Educacional Ltda. leases a facility from OSC Empreendimentos Ltda., which are entities under common control of the Company’s controlling shareholder.

 

Key management personnel compensation

 

Key management personnel compensation comprised the following:

 

   March 31, 2019  March 31, 2018
   (unaudited)  (unaudited)
Short-term employee benefits   3,112    2,041 
Share-based compensation plan   -    343 
    3,112    2,384 

 

For the three-month period ended March 31, 2019, there was no recognition of expenses since Arco's stock option plan is fully vested (see note 15.b).

 

Compensation of the Company’s key management includes short-term employee benefits comprised by salaries, bonuses, labor and social charges, and other ordinary short-term employee benefits.

 

Certain executive officers also participate in the Company’s share-based compensation plan (Note 15).

 

9Investments and interests in other entities

 

(a)Investments

 

(i)Investments and interests in other entities

 

Reconciliation of carrying amount:

 

   March 31, 2019  March 31, 2018
   (unaudited)  (unaudited)
   WPensar  Geekie  Total  Total
At beginning of the period   3,237    8,625    11,862    12,654 
Share of profit of equity-accounted investees   (41)   (451)   (492)   (65)
At end of the period   3,196    8,174    11,370    12,589 

F-17

 

(ii)Selected financial information for associates and joint ventures

 

   Geekie  WPensar
March 31, 2019 (unaudited)      
Current assets   9,831    1,678 
Non-current assets   13,187    1,505 
Current liabilities   4,914    302 
Non-current liabilities   10,000    1,188 
Equity   8,104    1,693 
Net revenue   3,726    1,254 
Costs and expenses (*)   (5,978)   (1,144)
Profit (loss) for the period   (2,253)   110 
March 31, 2018 (unaudited)          
Net revenue   1,695    987 
Costs and expenses (*)   (3,983)   (862)
Profit (loss) for the period   (2,288)   125 
December 31, 2018          
Current assets   5,215    1,625 
Non-current assets   12,174    1,414 
Current liabilities   7,681    286 
Non-current liabilities   -    1,170 
Equity   9,708    1,583 

 

(*)Comprise costs, selling and administrative expenses, finance result, other expenses and income tax and social contribution.

 

10Property and equipment

 

Reconciliation of carrying amount:

 

 March 31, 2019
(unaudited)
  March 31,2018
(unaudited)
   Machinery and equipment  Vehicles  Furniture and
 fixtures
  IT equipment  Facilities  Leasehold
improvements
  Others  Total  Total
                            
Cost                           
At beginning of the period   896    191    2,296    5,080    325    4,638    6,199    19,625    12,926 
Additions   4    -    80    298    27    1,595    789    2,793    930 
Disposals   (3)   -    -    (2)   -    (23)   (1,055)   (1,083)   (155)
Alienation of Escola de Aplicação
São José dos Campos Ltda.
   (50)   -    (201)   (51)   -    (710)   -    (1,012)   - 
Write-offs   -    -    -    -    -    -    (792)   (792)   - 
At end of the period   847    191    2,175    5,325    352    5,500    5,141    19,531    13,701 
                                              
Depreciation                                             
At beginning of the period   (254)   (144)   (527)   (1,910)   (100)   (1,274)   (2,069)   (6,278)   (3,847)
Depreciation charge for the period   (19)   (6)   (53)   (236)   (8)   (106)   (279)   (707)   (564)
Depreciation of disposals   -    -    -    -    11    43    927    981    17 
Alienation of Escola de Aplicação
São José dos Campos
   10    -    34    17    -    150    -    211    - 
At end of the period   (263)   (150)   (546)   (2,129)   (97)   (1,187)   (1,421)   (5,793)   (4,394)
                                              
Net book value                                             
As of December 31, 2018   642    47    1,769    3,170    225    3,364    4,130    13,347    9,079 
As of March 31 (unaudited)   584    41    1,629    3,196    255    4,313    3,720    13,738    9,307 

 

F-18

 

The Company assesses, at each reporting date, whether there is an indication that a property and equipment asset may be impaired. If any indication exists, the Company estimates the asset’s recoverable amount. There were no indications of impairment of property and equipment for the three-month periods ended March 31, 2019 and 2018.

 

11Leases

 

The balance sheet shows the following amounts relating to leases:

 

   March 31, 2019
   (unaudited)
Right-of-use assets   
Properties   18,403 
    18,403 

 

 

   March 31, 2019
   (unaudited)
Lease liabilities *   
Current   (4,232)
Non-current   (17,410)
    (21,642)

 

* For the adjustments recognized on adoption of IFRS 16 on January 1, 2019, please refer to note 2.3.

 

Set out below, are the carrying amounts of the Company’s right-of-use assets and lease liabilities and the movements during the period:

 

   Right-of-use assets – Properties  Lease
Liabilities
As at January 1, 2019   20,102    (22,321)
Lease modification   (559)   559 
Depreciation expense   (1,140)   - 
Interest expense   -    (395)
Payments   -    515 
As at March 31, 2019   18,403    (21,642)

 

The Company recognized rent expense from short-term leases and low-value assets of R$ 578 for the three-month period ended March 31, 2019.

 

There were no additions to the right-of-use assets during the three-month period ended March 31, 2019.

 

F-19

 

The statement of income shows the following amounts relating to leases:

 

   March 31, 2019
   (unaudited)
Depreciation charge of right-of-use assets   
Properties   1,140 
    1,140 

 

   March 31, 2019
   (unaudited)
Interest expense   
Expense relating to short-term leases (included in cost of sales and general and administrative expenses)   578 

 

The total cash outflow for leases in 2019 was R$ 515.

 

F-20

 

12Intangible assets

 

     

March 31, 2019

(unaudited)

 

March 31,2018

(unaudited)

   Goodwill  Rights on contracts  Customer relationships  Educational system 

Copyrights

 

  Software license  Trademarks  Educational platform  Non- compete agreement 

In

Progress

  Total  Total
                                     
                                     
Cost                                    
At the beginning of the period   89,634    15,263    23,045    36,656    12,692    2,808    19,141    21,911    1,097    2,249    224,496    195,093 
Corporate restructuring (Note 2.2)   (14,597)   -    -    -    -    -    -    -    -    -    (14,597)   - 
Acquisitions   -    -    -    -    2,348    826    3    6,854    -    1,461    11,492    1,855 
At end of the period   75,037    15,263    23,045    36,656    15,040    3,634    19,144    28,765    1,097    3,710    221,391    196,948 
                                                             
Amortization                                                            
At the beginning of the period   -    (3,949)   (7,560)   (12,716)   (3,939)   (648)   (3,810)   (3,860)   (274)   -    (36,756)   (19,610)
Amortization   -    (312)   (696)   (1,526)   (1,283)   (158)   (392)   (1,875)   (54)   -    (6,296)   (3,810)
At end of the period   -    (4,261)   (8,256)   (14,242)   (5,222)   (806)   (4,202)   (5,735)   (328)   -    (43,052)   (23,420)
                                                             
Net book value                                                            
At the beginning of the period   89,634    11,314    15,485    23,940    8,753    2,160    15,331    18,051    823    2,249    187,740      
At end of the period  (unaudited)   75,037    11,002    14,789    22,414    9,818    2,828    14,942    23,030    769    3,710    178,339    173,528 

F-21

 

(a)Goodwill

 

The carrying amount of goodwill by operating segment was:

 

  

March 31, 2019

(unaudited)

  December 31, 2018
       
Core   47,439    62,036 
Supplemental   27,598    27,598 
    75,037    89,634 

 

Impairment test for goodwill

 

The Company performed its annual impairment test in December and when circumstances indicated that the carrying value may be impaired. The Company’s impairment test for goodwill is based on value-in-use calculations. The key assumptions used to determine the recoverable amount for the different cash generating units were disclosed in the annual consolidated financial statements for the year ended December 31, 2018.

 

There were no indications of impairment for the three-month periods ended March 31, 2019 and 2018.

 

(b)Other intangible assets

 

Intangible assets, other than goodwill, are valued separately for each acquisition and are amortized during each useful life. The useful lives and methods of amortization of other intangibles are reviewed at each financial year end and adjusted prospectively, if appropriate.

 

For the three-month periods ended March 31, 2019 and 2018 there were no indicatives that the Company’s intangible assets with definite lives might be impaired.

 

13Financial instruments from acquisition of interests

 

The breakdown of contingent consideration assets and liabilities and related derivative instruments from business combinations and acquisition of investments in associates and joint ventures is as follows:

 

   March 31, 2019  December 31, 2018
Assets  (unaudited)   
Derivative financial instruments      
Investment in Geekie   19,456    23,346 
Investment in WPensar   1,805    3,284 
    21,261    26,630 
Current   -    - 
Non current   21,261    26,630 

F-22

 

Liabilities  March 31, 2019  December 31, 2018
Derivative financial instruments  (unaudited)   
Investment in Geekie   (19,767)   (22,037)
Investment in WPensar   (1,827)   (3,006)
Deferred revenue in Escola de Aplicação São José dos Campos Ltda.   -    (54)
    (21,594)   (25,097)
Current   -    (51)
Non current   (21,594)   (25,046)

 

14Accounts payable to selling shareholders

 

The breakdown of the liabilities regarding balances of accounts payable and receivable from business combination and investments in associates is as follows:

 

   March 31, 2019  December 31, 2018
   (unaudited)   
Accounts payable to selling shareholders      
Acquisition of International School (a)   (180,964)   (174,410)
Acquisition of NS Educação Ltda. (b)   (7,078)   (6,971)
    (188,042)   (181,381)
Current   (841)   (830)
Non-current   (187,201)   (180,551)

 

(a)Upon acquiring control of International School, the shareholders entered into an agreement with put and call options over the remaining interest. Because the terms of the put and call options are symmetrical, the Company concluded that it is virtually certain that either the parent or the non-controlling shareholder will exercise the option because it will be in the economic interests of one of them to do so. The financial liability is recorded at the present value of the estimated amount payable to the non-controlling shareholder upon the exercise of the put or call options and discounted to present value using an estimated interest rate of 17,6%.

 

(b)This amount was retained as an escrow for any losses, which will be released in annual installments from December 30, 2018 to December 30, 2022.

 

15Labor and social obligations

 

(a)Variable remuneration (bonuses)

 

The Company recorded bonuses related to variable remuneration of employees and management in cost of sales, selling and administrative expenses in the amount of R$ 4,787.

 

F-23

 

(b)Share-based compensation plan

 

Arco Plan

 

Members of the Company’s Management participate in share based compensation plan. On February 25, 2019, one of the directors decided to exercise his stock options.

 

As of March 31, 2019, there were 992,517 outstanding share options (December 31, 2018: 1,091,039).

 

All options granted became vested as result of the IPO. As consequence, the full impact of the actual plan has been recorded in the consolidated statement of profit and in the share-based compensation reserve in equity in 2018.

 

The compensation expense for the Arco Plan recognized in the statement of income for the three-month period ended March 31, 2018 was R$ 340. There was no compensation expense for the three-month period ended March 31, 2019.

 

The following table illustrates the number and movements of share options during the period:

 

   Number of share options  Average exercise price per share option
Outstanding at December 31, 2018   1,091,039    12.56 
Granted   -    - 
Forfeited   -    - 
Exercised   (98,522)   12.56 
Expired   -    - 
Outstanding at March 31, 2019   992,517    12.97 

 

International School plan

 

There were no share options granted, forfeited, exercised and expired for the three-month period ended March 31, 2019.

 

The compensation expense for the International School Plan recognized in the statement of income for the three-month periods ended March 31, 2019 and 2018 was R$ 137 and R$ 137, respectively.

 

F-24

 

16Equity

 

Share capital

 

As of March 31, 2019, the Company’s share capital is represented by 50,359,549 common shares (December 31, 2018: 50,261,027) of par value of US$ 0.00005 each, comprised by 27,658,290 Class B common shares (December 31, 2018: 27,658,290) and 22,701,259 Class A common shares (December 31, 2018: 22,602,737).

 

On February 25, 2019, one of the directors exercised his stock options, resulting in a capital increase of R$1,218 and 98,522 of Class A common shares.

 

17Earnings per share (EPS)

 

Basic

 

Basic EPS is calculated by dividing profit attributable to the equity holders of the parent by the weighted average number of Class A and Class B common shares outstanding during the period.

 

Diluted

 

Diluted EPS is calculated by dividing profit attributable to the equity holders of the parent by the weighted average number of Class A and Class B common shares outstanding during the period plus the weighted average number of common shares that would be issued on conversion of all potential common shares with dilutive effects.

 

The following table reflects the profit attributable to equity holders of the parent and the share data used in the basic and diluted EPS computations:

 

                   
   March 31, 2019 (unaudited)  March 31, 2018 (unaudited)
   Class A  Class B  Total  Class A  Class B  Total
                   
Profit attributable to equity holders of the parent   13,903    16,938    30,841    18,231    22,308    40,539 
Weighted average number of common shares outstanding (thousand)   22,640    27,658    50,298    22,603    27,658    50,261 
Effects of dilution from:                              
Share-based compensation plan (thousands)   859    -         944    -      
                               
Basic earnings per share - R$   0.61    0.61         0.81    0.81      
Diluted earnings per share - R$   0.59    0.59         0.77    0.78      

 

The number of Class A and Class B common shares outstanding was retrospectively adjusted due to the issuance of new shares as a result of the IPO and the corporate reorganization, described in Note 1.

 

F-25

 

Diluted profit per share is calculated by the weighted average number of outstanding shares, in order to assume the conversion of all potential dilutive shares. Diluted result per share is calculated considering the instruments that may have a potential dilutive effect in the future, such as share-based payment instruments, using the treasury shares method when the effect is dilutive.

 

18Revenue

 

The Company’s net revenue is as follows:

 

   March 31, 2019  March 31, 2018
   (unaudited)  (unaudited)
Educational content   128,905    116,619 
Other   -    1,047 
 Taxes   -    (23)
 Returns and discounts   (11,850)   (4,009)
Net revenue   117,055    113,634 

 

   March 31, 2019  March 31, 2018
Segments  Core  Supplemental  Total  Core  Supplemental  Total
Type of goods or service  (unaudited)  (unaudited)  (unaudited)  (unaudited)  (unaudited)  (unaudited)
Educational content   99,150    17,905    117,055    97,321    14,869    112,190 
Other   -    -    -    1,444    -    1,444 
Total net revenue from contracts with customers   99,150    17,905    117,055    98,765    14,869    113,634 
Timing of revenue recognition                              
Transferred at a point in time   99,150    17,905    117,055    98,765    14,869    113,634 
Total net revenue from contracts with customers   99,150    17,905    117,055    98,765    14,869    113,634 

 

The Company’s revenues from contracts with customers are all in Brazil.

 

The Company recognized impairment losses on trade receivables arising from contracts with customers, included under selling expenses in the statement of income, of R$ 1,653 and R$ 3,534 for the three-month periods ended March 31, 2019 and 2018, respectively.

 

Revenues tax benefits

 

The Company is not subjected to the payment of the social integration program tax (Programa de Integração Social, or PIS) and the social contribution on revenues tax (Contribuição para o Financiamento da Seguridade Social, or COFINS) on the sale of books. The sale of printed and digital books is also exempt from the Brazilian municipal taxes and from the Brazilian value added tax (Imposto sobre Operações relativas à Circulação de Mercadorias e sobre Prestações de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação, or ICMS).

 

F-26

 

19Expenses by nature

 

   Three-month periods ended
   March 31, 2019  March 31, 2018
   (unaudited)  (unaudited)
       
Content providing   11,208    15,886 
Operations personnel   2,323    4,142 
Inventory reserves   2,228    2,096 
Freight   3,094    859 
Depreciation and amortization   2,543    855 
Other   473    2,002 
Cost of sales   21,869    25,840 
           
Sales personnel   19,472    10,777 
Depreciation and amortization   3,095    3,051 
Sales & marketing   3,070    1,447 
Customer support   7,010    3,981 
Allowance for doubtful accounts   1,653    3,534 
Real estate rentals   563    447 
Other   1,272    1,075 
Selling expenses   36,135    24,312 
           
Corporate personnel   12,437    6,821 
Third party services   4,058    2,768 
Real estate rents   578    928 
Travel expenses   569    533 
Tax expenses   723    550 
Software licenses   189    459 
Share-based compensation plan   137    344 
Depreciation and amortization   1,602    420 
Other   539    872 
General and administrative expenses   20,832    13,695 
           
Total   78,836    63,847 

 

F-27

 

20Finance result

 

   March 31, 2019  March 31, 2018
   (unaudited)  (unaudited)
           
Income from financial investments   12,063    1,599 
Changes in fair value of financial investments (a)   278    - 
Changes in fair value of derivative instruments (b)   3,449    1,880 
Foreign exchange gains   312    - 
Other   854    230 
Finance income   16,956    3,709 
           
Changes in fair value of derivative instruments (b)   (5,369)   (273)
Interest expenses (c)   (7,524)   (2,498)
Financial discounts granted   (1,066)   (703)
Bank fees   (1,080)   (80)
Interest on lease expenses   (395)   - 
Other   (1,047)   (371)
Finance costs   (16,481)   (3,925)
           
Finance result   475    (216)

 

(a)Refers to gains on financial investments measured at FVPL.

 

(b)Refers to changes in the fair value of derivative financial instruments, comprised of the put and call options from business acquisitions and investments in associates and joint ventures.

 

(c)Refer to interest expense on liabilities related to business combinations and investments in associates.

 

21Income taxes

 

(a) Reconciliation of income taxes expense

 

   March 31, 2019  March 31, 2018
   (unaudited)  (unaudited)
       
Profit before income taxes   41,561    53,154 
Combined statutory income taxes rate - %   34%   34%
    (14,131)   (18,072)
Income taxes at statutory rates          
           
Reconciliation adjustments:          
  Share of loss of equity-accounted investees (a)   (167)   (22)
   Effect of presumed profit of subsidiaries (b)   4,738    5,523 
   Other additions (exclusions), net   (1,160)   (192)
           
Income taxes expense   (10,720)   (12,763)
           
Effective rate   25.8%   24.0%

  

(a)Refers to the effect of 34% on the share of profit of investees for the year.

 

F-28

 

(b)Brazilian tax law establishes that companies that generate gross revenues of up to R$ 78,000 in the prior fiscal year may calculate income taxes as a percentage of gross revenue, using the presumed profit income tax regime. The Company’s subsidiaries adopted this tax regime and the effect of the presumed profit of subsidiaries represents the difference between the taxation based on this method and the amount that would be due based on the statutory rate applied to the taxable profit of the subsidiaries. The variance between for the three-month periods ended March 31, 2019 and 2018 is due to the effect of presumed profit taxation of certain subsidiaries, which have a lower income tax rate but had a higher profit before income tax.

 

(b) Deferred income taxes

 

The changes in the deferred tax assets and liabilities are as follows:

 

   As of December 31, 2018  Change in accounting practice  Recognized in profit or loss  Recognized in equity  As of March 31, 2019
Deferred tax assets                       (unaudited) 
Tax losses carryforward   4,364    -    (998)   -    3,366 
Temporary differences                         
Financial instruments from acquisition of interests   59,166    -    4,056    -    63,222 
Other temporary differences   6,585    731    7,903    -    15,219 
Tax benefit from tax deductible goodwill (a)   46,314    -    (85)   5,135    51,364 
Amortization of intangible assets   1,282    -    57    -    1,339 
Total deferred tax assets   117,711    731    10,933    5,135    134,510 
Deferred tax liabilities                         
Financial instruments from acquisition of interests   (18,166)   -    (1,122)   -    (19,288)
Other temporary differences   (1,463)   -    (2,279)   -    (3,742)
Total deferred tax liabilities   (19,629)   -    (3,401)   -    (23,030)
Deferred tax assets (liabilities), net   98,082    731    7,532    5,135    111,480 
                          
Deferred tax assets – non current   99,460                   112,647 
Deferred tax liabilities – non current   (1,378)                  (1,167)

 

(a)Refers to R$ 46,314 of tax benefit generated from the goodwill in the acquisition of EAS interest by GA Holding and R$ 5,135 to tax benefit generated from corporate restructuring described in Note 2.2.

 

As of March 31, 2019, the Company had unrecognized deferred income tax assets in the amount of R$ 1,809 (December 31, 2018: R$ 3,228) with respect to tax loss carryforward. The net operating losses carried forward do not expire, however, their compensation is limited to 30% of the annual taxable income. The recognition of the deferred income tax assets is supported by the Company’s forecasts of the future profitability and historical results.

 

F-29

 

22Segment information

 

Segment information is presented consistently with the internal reports provided to the Company’s main key executives and chief operating decision makers. They are responsible for allocating resources, assessing the performance of the operating segments, and making the Company’s strategic decisions.

 

The Executive Officers have defined the operating segments based on the reports used to make structured strategic decisions, which allow for decision-making based on these structures:

 

(i)Core: The Core Curriculum business segment provides solutions that address the Brazilian K-12 curriculum requirements through a personalized and interactive learning experience. Students access content in various formats, such as digital, video, print, and other audiovisual formats that are aligned with the daily curriculum of their classes;

 

(ii)Supplemental: The Supplemental Solutions business segment provide additional value-added content that private schools can opt in for, in addition to the Core Curriculum solution. Currently, the Company’s primary Supplemental product is an English as a second language (ESL) bilingual teaching program.

 

The Executive Officers do not make strategic decisions or evaluate performance based on geographic regions. Currently, the Company operates solely in Brazil and all the assets, liabilities and results are allocated in Brazil. Also, based on the agreements signed with schools as of March 31, 2019, none of our customers individually represented more than 5% of our total revenue.

 

Seasonality of operations

 

The Company typically delivers Core Curriculum content four times each year: in March, June, August and December. Supplemental Solutions content is delivered twice each year in June and December, typically two to three months prior to the start of each school quarter. This allows the private schools and their teachers to prepare classes in advance of each school quarter. Because revenue is recognized at the moment of delivery of the educational content, the fourth quarter results reflect the growth in the number of students from one school year to another. Consequently, the Company generally have higher revenues in the fourth quarter of the year compared to the preceding quarters.

 

F-30

 

   March 31, 2019 (unaudited)
   Core  Supplemental  Total reportable segments  Adjustments and eliminations  Total
Net revenue   99,150    17,905    117,055    -    117,055 
Cost of sales   (19,685)   (2,184)   (21,869)   -    (21,869)
Gross profit   79,465    15,721    95,186    -    95,186 
Selling expenses   (29,136)   (6,999)   (36,135)   -    (36,135)
Segment profit   50,329    8,722    59,051    -    59,051 
General and administrative expenses                       (20,832)
Other income, net                       3,359 
Operating profit                       41,578 
Finance income                       16,956 
Finance costs                       (16,481)
Share of loss of equity-accounted investees                       (492)
Profit before income taxes                       41,561 
Income taxes expense                       (10,720)
Profit for the period                       30,841 
                          
Other disclosures                         
Depreciation and amortization   6,698    542    7,240    -    7,240 
Investments in associates and joint ventures   11,370    -    11,370    -    11,370 
Capital expenditures   13,189    1,096    14,285    -    14,285 

F-31

 

   March 31, 2018 (unaudited)
   Core  Supplemental  Total reportable segments  Adjustments and eliminations  Total
Net revenue   98,765    14,869    113,634    -    113,634 
Cost of sales   (23,559)   (2,281)   (25,840)   -    (25,840)
Gross profit   75,206    12,588    87,794    -    87,794 
Selling expenses   (19,596)   (4,716)   (24,312)   -    (24,312)
Segment profit   55,610    7,872    63,482    -    63,482 
General and administrative expenses                       (13,695)
Other income, net                       3,648 
Operating profit                       53,435 
Finance income                       3,709 
Finance costs                       (3,925)
Share of loss of equity-accounted investees                       (65)
Profit before income taxes                       53,154 
Income taxes expense                       (12,763)
Profit for the period                       40,391 
                          
Other disclosures                         
Depreciation and amortization   4,021    353    4,374    -    4,374 
Investments in associates and joint ventures   12,589    -    12,589    -    12,589 
Capital expenditures   2,507    278    2,785    -    2,785 

 

Capital expenditures consist of additions of property and equipment and intangible assets. There were no inter-segment revenues in the three-month periods ended March 31, 2019 and 2018.

 

Segment performance is evaluated based on segment profit and is measured consistently with profit or loss in the consolidated financial statements. General and administrative expenses, other income (expenses) net, finance result, share of profit (loss) of equity-accounted investees and income taxes are managed on a Company basis and are not allocated to operating segments.

 

Segment profit excludes general and administrative expenses, other income (expenses), net, finance result, share of profit (loss) of equity-accounted investees and income taxes in order to demonstrate the results without the influence of shared service center expenses or significant items of income and expenses which may have an impact on the quality of earnings such as restructuring costs, legal expenses, and impairments.

 

There were no adjustments or eliminations in the profit or loss between segments. Segment assets and liabilities are measured in the same way as in the financial statements. These assets and liabilities are allocated based on the operations of the segment.

 

F-32

 

   Core  Supplemental  Total reportable segments  Adjustments and eliminations  Total
As of March 31, 2019 (unaudited)               
Total assets   1,337,720    68,444    1,406,164    (1,087)   1,405,077 
Total liabilities   303,779    10,961    314,740    (1,087)   313,653 
                          
As of December 31, 2018                         
Total assets   1,273,107    62,006    1,335,113    (235)   1,334,878 
Total liabilities   254,744    10,485    265,229    (235)   264,994 

 

23Financial instruments

 

The Company holds the following financial instruments:

 

Financial assets

  Assets at FVPL  Assets at amortized cost  Total
March 31, 2019 (unaudited)               
Cash and cash equivalents   4,357    -    4,357 
Financial investments   87,077    750,300    837,377 
Trade receivables   -    151,159    151,159 
Financial instruments from acquisition of interests   21,261    -    21,261 
    112,695    901,459    1,014,154 
                

Financial assets

  Assets at FVPL  Assets at amortized cost  Total
December 31, 2018         
Cash and cash equivalents   12,301    -    12,301 
Financial investments   2,370    808,789    811,159 
Trade receivables   -    136,611    136,611 
Financial instruments from acquisition of interests   26,630    -    26,630 
    41,301    945,400    986,701 
                

Financial liabilities

  Liabilities at FVPL  Liabilities at amortized cost  Total
March 31, 2019 (unaudited)         
Trade payables   -    13,970    13,970 
Financial instruments from acquisition of interests   21,594    -    21,594 
Accounts payable to selling shareholders   -    188,042    188,042 
Lease liabilities   -    21,642    21,642 
    21,594    223,654    245,248 

F-33

 

Financial liabilities

  Liabilities at FVPL  Liabilities at amortized cost  Total
December 31, 2018         
Trade payables   -    14,845    14,845 
Financial instruments from acquisition of interests   25,097    -    25,097 
Accounts payable to selling shareholders   -    181,381    181,381 
    25,097    196,226    221,323 

 

The Company’s exposure to certain risks associated with the financial instruments is discussed in Note 24.

 

The maximum exposure to credit risk at the end of the reporting period is the carrying amount of each class of financial assets mentioned above.

 

(a) Financial instruments at fair value through profit or loss

 

Financial investments

 

The Company designated part of its financial investments as financial assets at fair value through profit or loss.

 

Derivative instruments

 

The Company acquired entities under business combinations and through the acquisition of interests in associates and joint ventures. The share purchase agreements contain put and call options and forward contracts that are also measured at fair value through profit or loss.

 

As of and for the three-month periods ended March 31, 2019 and 2018 none of the Company’s derivatives have been designated as hedges for accounting purposes.

 

(ii) Amounts recognized in profit or loss

 

Changes in fair values of financial instruments at fair value through profit or loss are recorded in finance income (costs) in profit or loss (loss of R$ 1,866 and gain of R$ 1,607 for the three-month periods ended in March 31, 2019 and 2018, respectively).

 

(b) Recognized fair value measurements

 

(i) Fair value hierarchy

 

The table below explains the judgements and estimates made in determining the fair values of the financial instruments that are recognized and measured at fair value through profit or loss in the consolidated financial statements. To provide an indication about the reliability of the inputs used in determining fair value, the Company has classified its financial instruments into the three levels.

 

F-34

 

Assets and liabilities are measured and recognized at fair value as follows:

 

       
   Hierarchy  March 31, 2019  December 31, 2018
Financial assets             
Cash and cash equivalents  Level 2   4,357    12,301 
Financial investments  Level 2   87,077    2,370 
Derivative financial instruments  Level 3   21,261    26,630 
              
Financial liabilities             
Derivative financial instruments  Level 3   21,594    25,097 

 

As of March 31, 2019 and December 31, 2018, the Company assessed the fair values of its financial instruments. This assessment does not indicate fair values significantly different from the carrying amounts. The estimated realizable values of financial assets and liabilities were determined based on available market information and appropriate valuation methodologies.

 

The Company’s policy is to recognize transfers into and transfers out of fair value hierarchy levels as at the end of the reporting period.

 

There were no transfers between levels for recurring fair value measurements during the financial statement period.

 

(ii) Valuation techniques used to determine fair values

 

Specific valuation techniques used to value financial instruments include:

 

·the use of quoted market prices or dealer quotes for similar instruments;

·the fair value of derivatives is calculated with Black & Scholes; and

·the fair value of the remaining financial instruments is determined using discounted cash flow analysis.

 

All of the resulting fair value estimates are included in level 2 except for contingent consideration and certain derivative contracts, where the fair values have been determined based on present values and the discount rates used were adjusted for counterparty or own credit risk.

 

If the inputs used to measure the fair value of an asset or a liability fall into different levels of the fair value hierarchy, then the fair value measurement is categorized in its entirety in the same level of the fair value hierarchy as the lowest level input that is significant to the entire measurement.

 

F-35

 

(iii) Fair value measurements using significant unobservable inputs (level 3)

 

The following table presents the changes in level 3 items for the three-month periods ended March 31, 2019 and 2018.

 

Recurring fair value measurements  Financial instruments from acquisition of interests (assets)  Financial instruments from acquisition of interests (liabilities)
Balances as of December 31, 2017   12,511    (13,637)
Deferred revenue in Escola de Aplicação São José dos Campos Ltda.   -    13 
Gains recognized in statement of income   625    969 
Balances as of March 31, 2018 (unaudited)   13,136    (12,655)
           
Balances as of December 31, 2018   26,630    (25,097)
Deferred revenue in Escola de Aplicação São José dos Campos Ltda.   -    54 
Gains (loss) recognized in statement of income   (5,369)   3,449 
Balances as of March 31, 2019 (unaudited)   21,261    (21,594)

 

(iv) Transfers between levels 2 and 3

 

In the three-month periods ended March 31, 2019 and 2018, the Company did not transfer any financial instruments from level 2 into level 3.

 

(v) Valuation processes

 

The finance department of the Company performs and reviews the valuations of items required for financial reporting purposes, including level 3 fair values. Discussions of valuation processes and results conform with the Company’s yearly reporting periods. Also, the Company hires specialists to measure fair value of certain financial assets independently.

 

The main level 3 inputs used by the Company are derived and evaluated as follows:

 

·Discount rates for financial assets and financial liabilities are determined using a capital asset pricing model to calculate a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the asset.

·Risk adjustments specific to the counterparties (including assumptions about credit default rates) are derived from observable market data of credit risk grading.

·Earnings growth factors for unlisted equity securities are estimated based on market information for similar types of companies.

·Contingent consideration – expected cash outflows are estimated based on the terms of the business combinations and the entity’s knowledge of the business as well as how the current economic environment is likely to impact it.

 

F-36

 

24Risk

 

(a)Financial risk management

 

The Company monitors market, credit and operational risks in line with the objectives in capital management and counts with the support, monitoring and oversight of the Board of Directors in decisions related to capital management and its alignment with the objectives and risks. The Company monitors the effectiveness of the Company’s risk management.

 

The sensitivity analyses in the following sections relate to the position as of March 31, 2019.

 

Capital management

 

The Company’s objectives when managing capital are to:

 

·maximize shareholder value;

·safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and

·maintain an optimal capital structure to reduce the cost of capital.

 

In order to maintain or alter the capital structure, the Company may adjust the amount of dividends paid to shareholders, return capital to shareholders, issue new shares or sell assets to reduce debt.

 

No changes were made in the objectives, policies or processes for managing capital during the three-month period ended March 31, 2019.

 

(i)Foreign exchange risk

 

Exposure

 

The Company’s exposure to foreign currency risk as of March 31, 2019 and December 31, 2018, was as follows:

 

   March 31, 2019  December 31, 2018
Cash and cash equivalents   3,359    3,615 
Financial investments   1,312    - 

 

The Company does not operate outside Brazil and does not have exposure to foreign exchange risk on commercial transactions, i.e., revenues or expenses. The IPO proceedings were received in U.S. dollar but are not expected to be maintained in such currency.

 

F-37

 

Sensitivity analysis

 

The sensitivity analysis as of March 31, 2019 consider three scenarios of U.S. dollar exchange rate variation, as follows:

 

·Base scenario - exchange rate as of March 31, 2019 of R$ 3.8967 per US$ 1.00;

·Scenario I - a 10% increase in the U.S. dollar exchange rate, to R$ 4.2864; and

·Scenario II - a 10% decrease in the U.S. dollar exchange rate, to R$ 3.5070.

 

The table below set forth the sensitivity analysis as of March 31, 2019, for the amount of cash and cash equivalents denominated in U.S. dollar of US$ 1,199 thousand:

 

  

Base scenario

Scenario I

Scenario II

 

Exchange rate:

R$ 3.8967 

Exchange rate:
R$ 4.2864
Exchange rate:
R$ 3.5070
Finance income (costs)   R$ 467 R$ (467)

 

(ii)Liquidity risk

 

Management of the Company has responsibility for mitigating liquidity risk. In order to achieve their goals, management regularly reviews the risk and maintains appropriate reserves, including bank credit facilities with first tier financial institutions. Management also continuously monitors projected and actual cash flows and the combination of the maturity profiles of the financial assets and liabilities.

 

The main requirements for financial resources used by the Company arise from the need to make payments for printing educational content, freight expenses, operating expenses, labor and social obligations and other operating disbursements.

 

The table below summarizes the maturity profile of the Company’s financial liabilities based on contractual undiscounted amounts:

 

As of March 31, 2019 (unaudited)

  On demand  Less than 3 months  3 to 12 months  1 to 5 years  More than 5 years  Total
Trade payables   -    13,970    -    -    -    13,970 
Lease liabilities   -    994    3,238    17,410    -    21,642 
Financial instruments from
acquisition of interests
   -    -    -    21,594    -    21,594 
Accounts payable to selling
shareholders
   -    -    841    187,201    -    188,042 
    -    14,964    4,079    226,205    -    245,248 

F-38

 

(iii)Financial counterparty risk

 

This risk arises from the possibility that the Company may incur losses due to the default of its counterparties. To mitigate these risks, the Company adopts as practice the analysis of the financial and equity situation of its counterparties.

 

Counterparty credit limits, which take published credit ratings and other factors into account, are set to cover the Company’s total aggregate exposure to a single financial institution. Exposures and limits applicable to each financial institution are approved by our treasury within guidelines approved by the board and are reviewed on a regular basis.

 

(iv)Interest rate risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s investments with floating interest rates. The Company is mainly exposed to fluctuations in CDI interest rates on financial investments.

 

Sensitivity analysis

 

The Company has a significant portion of its financial investments indexed to the CDI variation. According to the reference rates obtained from the website of the Brazilian Stock Exchange – B3 S.A. - Brasil, Bolsa, Balcão (“B3”) and projected for 12 months, as of March 31, 2019 the CDI rate was 6.40%.

 

As of March 31, 2019, the Company’s management estimated two scenarios of the CDI rates at +10% and -10%, which were used as a basis for the possible and remote scenarios, respectively. The table below shows a summary of the scenarios estimated by Management and the effect on profit before income taxes:

 

    Exposure    +10%    -10% 
March 31, 2019 (unaudited)               
Cash, bank deposits and cash equivalents   998    6    (6)
Financial investments   836,065    5,350    (5,350)

 

The Company has derivatives (calls and put options) on non-controlling interests in associates and joint ventures acquired. The fair value of these derivatives is calculated using multiple scenarios and intrinsic methods. The major inputs are: exercise price, exercise date, volatility and gross profit of the associates and joint ventures.

 

The Company performed evaluation of their fair value at the end of each period in order to account for any changes to it, as disclosed in Note 23. These derivatives, which are not publicly traded, have specific conditions that do not enable us to present a sensitivity analysis in relation to specific interest rates or market indexes. Also, these derivatives are part of the Company’s strategy to acquire companies directly related to our continuous growth and are considered by the Company as a deferred payment to the previous shareholders' of the acquirees.

 

F-39

 

25Commitments and contingencies

 

(i)Legal proceedings

 

The Company is party to labor and tax litigation in progress, which arise during the ordinary course of business. The provisions for probable losses arising from these matters are estimated and periodically adjusted by Management, supported by the opinion of its external legal advisors.

 

   Labor  Taxes  Total
    (unaudited)    (unaudited)    (unaudited) 
                
Balances at December 31, 2018   17    114    131 
Additions   81    -    81 
Reversals   (2)   -    (2)
Balances at March 31, 2019   96    114    210 

 

As of March 31, 2019, the Company was party to lawsuits classified as possible losses totaling R$ 5,452 (R$ 5,170 as of December 31, 2018), as shown below:

 

   March 31, 2019  December 31, 2018
   (unaudited)   
Civil (a)   4,919    4,425 
Labor (b)   533    745 
Total   5,452    5,170 

 

(a)The civil proceedings relate mainly to customer claims, including those related to the early termination of certain agreements, among others.

 

(b)The labor proceedings to which the Company is a party were filed by former employees or suppliers and third-party service providers’ employees seeking joint liability for the acts of the Company’s suppliers and service providers.

 

26Transactions not involving cash

 

The Company carried out the non-cash activities in the three-month period ended March 31, 2019, which are not reflected in the statement of cash flows, mainly related to the corporate restructuring described in Note 2.2 and the recognition of right-of-use asses and lease liabilities as a result of the adoption of IFRS 16.

 

F-40

 

27Subsequent events

 

Acquisition of EEM Licenciamento de Programas Educacionais S.A.

 

On April 29, 2019, the Company has entered in an agreement to acquire all the shares of EEM Licenciamento de Programas Educacionais S.A. (“EEM”). EEM is an app developer that enhances communication between schools and parents.

 

The acquisition price is R$ 18,324, subject to a price adjustment, due to variations in the EEM’s net debt up to the closing date. Acquisition depends of the approval from CADE, the Brazilian anti-trust agency, which is preceding condition for closing the acquisition.

 

Acquisition of Sistema Positivo de Ensino (“Positivo”)

 

On May 7, 2019, the Company announced that it has entered into a definitive agreement to acquire Sistema Positivo de Ensino (Positivo), one of the largest K-12 content providers to private schools in Brazil, for R$1,650 million in cash.

 

Under terms of the agreement, Arco will acquire Positivo for R$1,650 million in cash, with 50% due at the time of closing. The remaining 50% will be paid over 5 years, with no payment in 2020, 20% paid in 2021 and 2022, and 30% paid in 2023 and 2024, all adjusted by the Certificate Deposit Interbank (CDI). The acquisition has been approved by the Boards of Directors of both Arco and Positivo. The transaction is not subject to any shareholder votes, but is subject to customary closing conditions, including antitrust and other regulatory approvals.

 

Acquisition of Nave à Vela Ltda. (“Nave”)

 

On May 13, 2019, the selling shareholders of Nave, a developer of competence-based learning content and methodology, approved a capital increase through the issuance of 760 new common shares, registered and without par value, for the total subscription price of R$ 4,200, corresponding to a minority interest of 13.2% of the total amount of shares issued. After this date, the Nave will be managed by Directors and a Consulting Board, composed of three members, which one member will be indicated by the buyer and the others by the sellers.

 

The acquisition of the remaining 86.8% of the total capital will occur in the next three years (subject to price adjustment, by the net debt at each closing date).

 

 

***

 

F-41

 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    Arco Platform Ltd.  
       
       
      By: /s/ Ari de Sá Cavalcante Neto  
        Name: Ari de Sá Cavalcante Neto  
        Title: Chief Executive Officer  

 

Date: May 21, 2019