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 March, 2020

 

 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
+55 (11) 3047-2655

(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  ¨

 

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  ¨   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  ¨   No

x

 

 

 

 

 

TABLE OF CONTENTS

 

EXHIBIT  
99.1 Press release dated March 16, 2020 – Arco Platform Limited Reports Fourth Quarter and Full Year 2019 Financial Results
99.2 Audited Consolidated Financial Statements as of and for the year ended December 31, 2019

 

 

 

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: March 16, 2020

 

 

Exhibit 99.1

 

 

 

Arco Platform Limited Reports Fourth Quarter and Full Year 2019 Financial Results

 

Arco beat its adjusted EBITDA margin guidance, achieving 37.9% excluding the M&A effect and confirmed the 2020 ACV of R$1,006 million.

 

São Paulo, Brazil, March 16, 2020 – Arco Platform Limited, or Arco (Nasdaq: ARCE), today reported financial and operating results for the fourth quarter and full year ended December 31, 2019.

 

“2019 was a very successful year for Arco with several milestones achieved, such as the acquisition of Positivo and the expansion and diversification of our platform of solutions to schools. We concluded another very strong sales cycle, beating our initial expectations for both Arco stand-alone and Positivo, reaching 1,360,000 students spread throughout 5,400 schools. We are extremely excited with the opportunities ahead of us.” said Ari de Sá Neto, CEO and founder of Arco.

 

“We are committed to grow fast and responsibly, maintaining the constant improvement of our solutions while effectively controlling costs, as shown by our margins”.

 

Full Year 2019 Results

 

·Net Revenue of R$572.8 million;
·Net Loss of R$9.4 million;
·

Adjusted Net Income of R$169.5 million; and

·Adjusted EBITDA of R$209.4 million.

 

Fourth Quarter 2019 Results

 

·Net Revenue of R$247.6 million;
·Net Profit of R$42.5 million;
·Adjusted Net Income of R$77.0 million; and
·Adjusted EBITDA of R$106.3 million.

 

Revenue Recognition and Seasonality

 

As we report the fourth quarter and full year 2019 results, it is important to highlight the revenue recognition and seasonality of our business.

 

 

 

 

We typically deliver our Core Curriculum content four times each year, in March, June, August and December and our Supplemental Solutions content twice each year, in June and December, usually two to three months prior to the start of each school quarter. The amount of revenue recognized is proportional to the amount of content made available, which is not linearly distributed among the quarters. This causes revenue seasonality in our business, in which the third quarter revenue is the lowest point of the 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.

 

2020 ACV Bookings Confirmation (From October 2019 to September 2020):

 

·2020 ACV Bookings for Arco Platform is R$1,006 million.
·ACV Bookings for Arco, excluding Positivo, grows at 35% YoY.

 

First Quarter 2020 guidance:

 

·We expect to recognize in the first quarter (1Q20) 23% to 26% of the consolidated ACV Bookings 2020.

 

Full Year 2020 guidance:

 

·Adjusted EBITDA Margin is expected to be in the range of 35.5% to 37.5%.

 

Synergies resulting from the integration of Positivo Soluções Didáticas (“Positivo”): Arco’s revised integration plan estimates between R$50 million to R$70 million in annual EBITDA impact by the fourth year of integration. Besides that, the Purchase Price Allocation for the acquisition of Positivo based on October 2019 figures resulted in an estimate of R$1,557 million of both identifiable intangible assets and goodwill, which should generate an estimated tax benefit of R$529 million over their amortization period, from the time the incorporation of Positivo by EAS Educação is finalized, which we expect will happen in the third quarter 2020. The unused portion in the year of the amortization, should generate a tax loss, which may be offset in the coming years, limited to 30% of the tax profit.

 

About Arco Platform Limited (Nasdaq: ARCE)

 

Arco has empowered hundreds of thousands of students to rewrite their futures through education. Our data-driven learning, interactive proprietary content, and scalable curriculum allows students to personalize their learning experience with high-quality solutions while enabling schools to provide a broader approach to education.

 

Forward-Looking Statements

 

This press release contains forward-looking statements as pertains to Arco Platform Limited (the “Company”) within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, the Company’s expectations or predictions of future financial or business performance conditions. The achievement or success of the matters covered by statements herein involves substantial known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, the Company’s results could differ materially from the results expressed or implied by the statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward looking statements are made based on the Company’s current expectations and projections relating to its financial conditions, result of operations, plans, objectives, future performance and business, and these statements are not guarantees of future performance.

 

 

 

 

Statements which herein address activities, events, conditions or developments that the Company expects, believes or anticipates will or may occur in the future are forward-looking statements. You can generally identify forward-looking statements by the use of forward-looking terminology such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “evaluate,” “expect,” “explore,” “forecast,” “guidance,” “intend,” “likely,” “may,” “might,” “outlook,” “plan,” “potential,” “predict,” “probable,” “project,” “seek,” “should,” “view,” or “will,” or the negative thereof or other variations thereon or comparable terminology. All statements other than statements of historical fact could be deemed forward looking, including risks and uncertainties related to statements about our competition; our ability to attract, upsell and retain customers; our ability to increase the price of our solutions; our ability to expand our sales and marketing capabilities; general market, political, economic, and business conditions in Brazil or abroad; and our financial targets which include revenue, share count and other IFRS measures, as well as non-IFRS financial measures including Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin and Free Cash Flow.

 

Forward-looking statements represent the Company management’s beliefs and assumptions only as of the date such statements are made, and the Company undertakes no obligation to update any forward-looking statements made in this presentation to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law.

 

Further information on these and other factors that could affect the Company’s financial results is included in filings the Company makes with the Securities and Exchange Commission from time to time, including the section titled “Risk Factors” in the Company’s most recent Forms 20-F and 6-K. These documents are available on the SEC Filings section of the Investor Relations section of the Company’s website at: https://investor.arcoplatform.com/

 

 

 

 

Key Business Metrics

 

ACV Bookings: 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 define “school year” for purposes of calculation of ACV Bookings as the twelve-month period starting in October of the previous year to September of the mentioned current 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.

 

Non-GAAP Financial Measures

 

To supplement the Company's consolidated financial statements, which are prepared and presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board—IASB, we use Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income and Adjusted Net Income Margin which are non-GAAP financial measures.

 

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, plus M&A expenses and plus non-recurring expenses. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by Net Revenue, multiplied by 100%.

 

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, (v) non-compete agreement and (vi) softwares resulting from aquisitions) less/plus changes in fair value of derivative instruments (which refers to (i) changes in fair value of derivative instruments—finance income, and plus (ii) changes in fair value of derivative instruments—finance costs), less/plus changes in accounts payable to selling shareholders plus share of loss of equity-accounted investees plus interest expenses plus/minus changes in current and deferred tax recognized in statements of income applied to all adjustments to net income, plus/minus foreign exchange gains/loss on cash and cash equivalents, plus M&A expenses and plus non-recurring expenses. We calculate Adjusted Net Income Margin as Adjusted Net Income divided by Net Revenue, multiplied by 100%.

 

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 EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin 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 EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin 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.

 

 

 

 

Conference Call Information

 

Arco will discuss its fourth quarter and full year 2019 results today, March 16, 2020, via a conference call at 4:30 p.m. Eastern Time. To access the call (ID: 7458624), please dial: (866) 679-4032 or +1 (409) 217-8315. An audio replay of the call will be available through March 30, 2020 by dialing (855) 859-2056 or +1 (404) 537-3406 and entering access code 7458624. A webcast of the call will be available on the Investor Relations section of the Company’s website at https://arcoeducacao.gcs-web.com/.

 

Investor Relations Contact:

 

Arco Platform Limited

[email protected]

Source: Arco Platform Ltd.

  

 

 

 

Arco Platform Limited 

Condensed Statements of Financial Position

 

    December 31,    December 31, 
(In thousands)   2019    2018 
  R$   R$ 
Assets        
Current assets          
Cash and cash equivalents   48,900    12,301 
Financial investments   574,804    806,789 
Trade receivables   329,428    136,611 
Inventories   40,106    15,131 
Recoverable taxes   15,612    11,227 
Financial instruments from acquisition of interests   3,794    - 
Related parties   1,298    - 
Other assets   14,630    6,091 
Total current assets   1,028,572    988,150 
Non-current assets          
Financial instruments from acquisition of interests   32,152    26,630 
Deferred income tax   156,748    99,460 
Recoverable taxes   6,613    1,033 
Financial investments   4,690    4,370 
Related parties   14,813    1,226 
Other assets   14,399    1,060 
Investments and interests in other entities   48,574    11,862 
Property and equipment   21,328    13,347 
Right-of-use assets   21,631    - 
Intangible assets   1,811,903    187,740 
Total non-current assets   2,132,851    346,728 
Total assets   3,161,423    1,334,878 
Liabilities          
Current liabilities          
Trade payables   34,521    14,845 
Labor and social obligations   68,511    15,888 
Taxes and contributions payable   7,508    2,555 
Income taxes payable   52,038    17,294 
Advances from customers   25,626    5,997 
Lease liabilities   6,845    - 
Loans and financing   98,561    - 
Financial instruments from acquisition of interests   -    51 
Accounts payable to selling shareholders   117,959    830 
Other liabilities   607    428 
Total current liabilities   412,176    57,888 
Non-current liabilities          
Labor and social obligations   2,801    - 
Lease liabilities   19,012    - 
Financial instruments from acquisition of interests   33,940    25,046 
Provision for legal proceedings   251    131 
Deferred income tax   -    1,378 
Accounts payable to selling shareholders   1,098,273    180,551 
Other liabilities   160    - 
Total non-current liabilities   1,154,437    207,106 
Equity          
Share capital   11    10 
Capital reserve   1,607,622    1,089,505 
Share-based compensation reserve   84,546    67,350 
Accumulated losses   (97,369)   (86,687)
Equity attributable to equity holders of the parent   1,594,810    1,070,178 
Non-controlling interests   -    (294)
Total equity   1,594,810    1,069,884 
Total liabilities and equity   3,161,423    1,334,878 

 

 

 

 

Arco Platform Limited

Consolidated Statements of Income (Loss)

 

   Three months ended
December 31,
   Twelve months ended
December 31,
 
(In thousands, except earnings per share)  2019   2018   2019   2018 
   R$   R$   R$   R$ 
Net revenue   247,644    121,009    572,837    380,981 
Cost of sales   (55,374)   (23,917)   (117,258)   (80,745)
Gross profit   192,270    97,092    455,579    300,236 
Operating expenses:                    
Selling expenses   (76,691)   (35,201)   (199,780)   (113,270)
General and administrative expenses   (56,165)   (22,010)   (191,438)   (129,754)

Other income (expense), net

   (8,738)   342    (6,287)   4,856 
Operating profit   50,676    40,223    58,074    62,068 
Finance income   24,943    22,835    72,047    36,618 
Finance costs   (37,032)   (182,789)   (170,855)   (198,795)
Finance result   (12,089)   (159,954)   (98,808)   (162,177)
Share of loss of equity-accounted investees   153    (243)   (1,800)   (792)
Profit (loss) before income taxes   38,740    (119,974)   (42,534)   (100,901)
Income taxes - income (expense)                    
Current   (14,596)   (3,304)   (46,850)   (26,553)
Deferred   18,371    46,389    79,953    44,538 
Total income taxes – income (expense)   3,775    43,085    33,103    17,985 
Profit (loss) for the period   42,515    (76,889)   (9,431)   (82,916)
Equity holders of the parent   42,515    (76,819)   (9,431)   (82,380)
Non-controlling interests   -    (70)   -    (536)
                     
Basic earnings per share – in Brazilian reais                    
Class A   0.79   (1.53)   (0.18)   (1.64)
Class B   

0.79

   (1.53)   (0.18)   (1.64)
Diluted earnings per share – in Brazilian reais                    
Class A   0.78   (1.53)   (0.18)   (1.64)
Class B   

0.78

   (1.53)   (0.18)   (1.64)
Weighted-average shares used to compute net income per share:                    
Basic   53,812    50,261    51,552    50,261 
Diluted   

54,149

    50,261    51,552    50,261 

 

 

 

 

Arco Platform Limited

Consolidated Statements of Cash Flows

 

  Three months ended December 31,   Twelve months ended December 31,
(In thousands) 2019   2018   2019   2018
  R$   R$   R$   R$
Operating activities              
Profit (loss) before income taxes 38,740   (119,974)   (42,534)   (100,901)
Adjustments to reconcile (loss) profit before income taxes              
Depreciation and amortization 23,865   5,735   48,314   19,594
Inventory reserves 4,273   4,875   8,476   7,252
Allowance for doubtful accounts 7,903   3,875   17,392   9,588
Loss on sale/disposal of property and equipment and intangible 2,906   -   3,499   138
Fair value change in financial instruments from acquisition interests (10,822)   2,243   (473)   (659)
Changes in accounts payable to selling shareholders 7,622   130,378   89,403   130,378
Share of loss of equity-accounted investees (153)   243   1,800   792
Changes in fair value of step acquisitions (3,708)   -   (3,708)   -
Share-based compensation plan 612   138   33,043   60,297
Interest accretion on acquisition liability 17,496   2,378   42,206   8,704
Income from non-cash equivalents (45,797)   -   (45,797)   -
Interest on lease liabilities 258   -   1,489   -
Provision for legal proceedings 20   (10)   120   131
Provision for payroll taxes (restricted stock units) (15,066)   -   8,333   -
Foreign exchange loss 571   34,435   555   34,435
Gain on sale of investment (34)   -   (3,286)   -
Other financial cost/revenue, net 121   -   (1,360)   -
  28,807   64,316   157,472   169,749
Changes in assets and liabilities              
Trade receivables (176,193)   (83,440)   (136,407)   (57,020)
Inventories (3,669)   1,476   (14,637)   (3,563)
Recoverable taxes (944)   (3,789)   (8,494)   (3,807)
Other assets (9,376)   469   (16,035)   (2,254)
Trade payables (37)   5,420   8,455   10,256
Labor and social obligations (2,390)   1,840   15,950   7,169
Taxes and contributions payable 2,491   1,038   1,951   1,476
Advances from customers 22,334   2,028   19,997   99
Other liabilities 112   1,822   (268)   (3,342)
Cash generated from (used in) operations (138,865)   (8,820)   27,984   118,763
Income taxes paid (6,107)   (1,174)   (34,747)   (26,639)
Interest paid on lease liabilities (455)   -   (852)   -
Net cash flows from (used in) operating activities (145,427)   (9,994)   (7,615)   92,124
               
Investing activities              
Acquisition of property and equipment (3,382)   (2,807)   (10,991)   (6,854)
Payment of investments and interests in other entities (36,435)   -   (41,853)   (2,000)
Acquisition of subsidiaries, net of cash acquired (782,748)   -   (798,885)   -
Payment of accounts payable to selling shareholders -   (936)   -   (14,756)
Acquisition of intangible assets (16,741)   (19,555)   (43,102)   (29,403)
Purchase of financial investments 365,821   (756,473)   277,389   (727,951)
Loans to related parties -   -   (14,000)   -
Net cash flows used in investing activities (473,485)   (779,771)   (631,442)   (780,964)
               
               
Financing activities              
Capital increase 1   -   13,830   3,091
Capital increase - proceeds from public offering 589,602   -   589,602   895,182
Share issuance costs (18,224)   (12,954)   (18,897)   (78,531)
Payment of lease liabilities (1,698)   -   (4,407)   -
Payment of loans and financing (511)   -   (563)   -
Loans and financing 97,574   -   97,574   -
Payment to owners to acquire entity’s shares (928)   -   (928)   -
Dividends paid -   -   -   (85,000)
Net cash flows from (used in) financing activities 665,816   (12,954)   676,211   734,742
               
Foreign exchange effects on cash and cash equivalents (572)   (34,435)   (555)   (34,435)
               
Increase (decrease) in cash and cash equivalents 46,332   (837,154)   36,599   11,467
Cash and cash equivalents at the beginning of the period -   849,455   12,301   834
Cash and cash equivalents at the end of the period 46,332   12,301   48,900   12,301
Increase (decrease) in cash and cash equivalents 46,332   (837,154)   36,599   11,467

  

 

 

 

Arco Platform Limited

Reconciliation of Non-GAAP Measures

 

   Three months ended December 31,   Twelve months ended December 31, 
(In thousands)  2019   2018   2019   2018 
Adjusted EBITDA Reconciliation  R$   R$   R$   R$ 
Profit (loss) for the period   42,515    (76,889)   (9,431)   (82,916)
(+) Income taxes   (3,775)   (43,085)   (33,103)   (17,985)
(+/-) Finance result   12,089    159,954    98,808    162,177 
(+) Depreciation and amortization   23,865    5,735    48,314    19,594 
(+) Share of loss of equity-accounted investees   (153)   243    1,800    792 
EBITDA   74,541    45,958    106,388    81,662 
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units).   11,148    138    66,978    60,297 
(+) M&A expenses   15,939    -    28,848    - 

(+) Non-recurring expenses

   4,675    -    7,142    - 
Adjusted EBITDA   106,303    46,096    209,356    141,959 
                     
Net Revenue   247,644    121,009    572,837    380,981 
EBITDA Margin   30.1%   38.0%   18.6%   21.4%
Adjusted EBITDA Margin   42.9%   38.1%   36.5%   37.3%

 

    Three months ended December31,    Twelve months ended December31, 
(In thousands)   2019    2018    2019    2018 
Adjusted Net Income Reconciliation  R$   R$   R$   R$

 

Profit (loss) for the period   42,515    (76,889)   (9,431)   (82,916)
(+) Share-based compensation plan, restricted stock units and provision for payroll taxes (restricted stock units).   11,148    138    66,978    60,297 
(+) Amortization of intangible assets from business combinations   13,485    2,958    23,173    11,766 
(+/-) Changes in fair value of derivative instruments   (10,822)   2,243    (473)   (659)
(+/-) Changes in accounts payable to selling shareholders   7,622    130,378    89,403    130,378 
(+) Share of loss of equity-accounted investees   (153)   243    1,800    792 
(-) Tax effects   (25,112)   (52,797)   (79,569)   (51,525)
(+) Foreign exchange on cash and cash equivalents   571    34,435    555    34,435 
(+) Interest expenses (income), net   17,153    2,419    41,042    9,781 
(+) M&A expenses   15,939    -    28,848    - 

(+) Non-recurring expenses

   4,675    -    7,142    - 
Adjusted Net Income   77,021    43,128    169,468    112,349 
                     
Net Revenue   247,644    121,009    572,837    380,981 
Adjusted Net Income Margin   31.1%   35.6%   29.6%   29.5%

 

   Three months ended December 31,   Twelve months ended December 31, 
(In thousands)  2019   2018   2019   2018 
Free Cash Flow Reconciliation  R$   R$   R$   R$ 
Cash generated from operations   (138,865)   (8,820)   27,984    118,763 
(-) Income tax paid   (6,107)   (1,174)   (34,747)   (26,639)
(-) Interest paid on lease liabilities   (455)   -    (852)   - 
Cash Flow from Operating Activities   (145,427)   (9,994)   (7,615)   92,124 
(-) Acquisition of property and equipment   (3,382)   (2,807)   (10,991)   (6,854)
(-) Acquisition of intangible assets   (16,741)   (19,555)   (43,102)   (29,403)
Free Cash Flow   (165,550)   (32,356)   (61,708)   55,867 
(+) Interest change in financial investments   45,797    -    45,797    - 
(+) Positivo's working capital   55,078    -    55,078    - 
(+) Business combinations   5,699    -    5,699    - 
(+) M&A expenses   15,939    -    28,848    - 
(+) Others   8,784    -    11,251    - 
(-) RSU's labor and social obligations   (3,561)   -    (3,561)   - 
Adjusted Free Cash Flow   (37,814)   (32,356)   81,404    55,867 

 

 

Exhibit 99.2

Arco Platform Limited

 

Consolidated financial statements

 

December 31, 2019

 

 

 

 

Report of Independent Registered Public Accounting Firm

 

To the Shareholders and the Board of Directors of

Arco Platform Limited

 

Opinion on the Financial Statements

 

We have audited the accompanying consolidated statements of financial position of Arco Platform Limited (the Company) as of December 31, 2019 and 2018, the related consolidated statements of income (loss) and comprehensive income (loss), changes in equity and cash flows for each of the three years in the period ended December 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2019, in conformity with International Financial Reporting Standards as issued by the International Accounting Standards Board - IASB.

 

Adoption of IFRS 16

 

As discussed in Note 2.5 to the consolidated financial statements, the Company changed its method for recognizing leases in 2019, due to the adoption of IFRS 16 – Lease using the modified retrospective method of adoption.

 

Basis for Opinion

 

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

 

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

 

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

 

 

/s/ ERNST & YOUNG

Auditores Independentes S.S.

 

 

We have served as the Company's auditor since 2017.

 

Fortaleza, Brazil

March 16, 2020

 

F-1

 

 

Arco Platform Limited

 

Consolidated statements of financial position

As of December 31, 2019 and 2018

(In thousands of Brazilian reais, unless otherwise stated)

 

   Notes  2019   2018 
Assets             
Current assets             
Cash and cash equivalents  5   48,900    12,301 
Financial investments  6   574,804    806,789 
Trade receivables  7   329,428    136,611 
Inventories  8   40,106    15,131 
Recoverable taxes  9   15,612    11,227 
Financial instruments from acquisition of interests  16   3,794    - 
Related parties  10   1,298    - 
Other assets      14,630    6,091 
Total current assets      1,028,572    988,150 
Non-current assets             
Financial instruments from acquisition of interests  16   32,152    26,630 
Deferred income tax  24   156,748    99,460 
Recoverable taxes  9   6,613    1,033 
Financial investments  6   4,690    4,370 
Related parties  10   14,813    1,226 
Other assets      14,399    1,060 
Investments and interests in other entities  11   48,574    11,862 
Property and equipment  12   21,328    13,347 
Right-of-use assets  13   21,631    - 
Intangible assets  14   1,811,903    187,740 
Total non-current assets      2,132,851    346,728 
Total assets      3,161,423    1,334,878 
              
Liabilities             
Current liabilities             
Trade payables      34,521    14,845 
Labor and social obligations  18   68,511    15,888 
Taxes and contributions payable      7,508    2,555 
Income taxes payable      52,038    17,294 
Advances from customers      25,626    5,997 
Lease liabilities  13   6,845    - 
Loans and financing  15   98,561    - 
Financial instruments from acquisition of interests  16   -    51 
Accounts payable to selling shareholders  17   117,959    830 
Other liabilities      607    428 
Total current liabilities      412,176    57,888 
Non-current liabilities             
Labor and social obligations  18   2,801    - 
Lease liabilities  13   19,012    - 
Financial instruments from acquisition of interests  16   33,940    25,046 
Provision for legal proceedings  28   251    131 
Deferred income tax  24   -    1,378 
Accounts payable to selling shareholders  17   1,098,273    180,551 
Other liabilities      160    - 
Total non-current liabilities      1,154,437    207,106 
Total liabilities      1,566,613    264,994 
              
Equity  19          
Share capital      11    10 
Capital reserve      1,607,622    1,089,505 
Share-based compensation reserve      84,546    67,350 
Accumulated losses      (97,369)   (86,687)
Equity attributable to equity holders of the parent      1,594,810    1,070,178 
Non-controlling interests      -    (294)
Total equity      1,594,810    1,069,884 
Total liabilities and equity       3,161,423    1,334,878 

 

The accompanying notes are part of the consolidated financial statements.

 

 F-2 

 

 

Arco Platform Limited

 

Consolidated statements of income (loss) and comprehensive income (loss)

For the years ended December 31, 2019, 2018 and 2017

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

 

   Notes  2019   2018   2017 
Net revenue  21   572,837    380,981    244,382 
Cost of sales  22   (117,258)   (80,745)   (58,517)
                   
Gross profit      455,579    300,236    185,865 
                   
Selling expenses  22   (199,780)   (113,270)   (65,314)
General and administrative expenses  22   (191,438)   (129,754)   (48,931)
Other income (expenses), net      (6,287)   4,856    3,299 
                   
Operating profit      58,074    62,068    74,919 
                   
Finance income  23   72,047    36,618    12,531 
Finance costs  23   (170,855)   (198,795)   (20,389)
Finance result  23   (98,808)   (162,177)   (7,858)
                   
Share of loss of equity-accounted investees  11   (1,800)   (792)   (705)
                   
Profit (loss) before income taxes      (42,534)   (100,901)   66,356 
Income taxes - income (expense)                  
Current      (46,850)   (26,553)   (31,010)
Deferred      79,953    44,538    8,294 
   24   33,103    17,985    (22,716)
                   
Profit (loss) for the year      (9,431)   (82,916)   43,640 
                   
Other comprehensive income for the year      -    -    - 
Total comprehensive income (loss) for the year      (9,431)   (82,916)   43,640 
                   
Profit (loss) attributable to                  
Equity holders of the parent      (9,431)   (82,380)   44,255 
Non-controlling interests      -    (536)   (615)
                   
Basic earnings per share - in Brazilian reais  20               
Class A      (0.18)   (1.64)   0.88 
Class B      (0.18)   (1.64)   0.88 
Diluted earnings per share - in Brazilian reais  20               
Class A      (0.18)   (1.64)   0.85 
Class B      (0.18)   (1.64)   0.85 

 

The accompanying notes are part of the consolidated financial statements.

 

 F-3 

 

 

Arco Platform Limited

 

Consolidated statements of changes in equity

For the years ended December 31, 2019, 2018 and 2017

(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, 2016   48,517    81,914    5,952    99,506    5,163    -    241,052    116    241,168 
                                              
Profit (loss) for the year   -    -    -    -    -    44,255    44,255    (615)   43,640 
Total comprehensive income   -    -    -    -    -    44,255    44,255    (615)   43,640 
Dividends paid   -    -    -    (57,210)   -    -    (57,210)   -    (57,210)
Capital increase   7,380    78,768    -    -    -    -    86,148    -    86,148 
Non-controlling interest increase   -    -    -    -    -    -    -    610    610 
Share-based compensation plan   -    -    -    -    1,890    -    1,890    -    1,890 
Legal reserve   -    -    2,213    -    -    (2,213)   -    -    - 
Minimum mandatory dividends   -    -    -    -    -    (10,511)   (10,511)   -    (10,511)
Earnings retention   -    -    -    31,531    -    (31,531)   -    -    - 
                                              
Balances at December 31, 2017   55,897    160,682    8,165    73,827    7,053    -    305,624    111    305,735 
Change in accounting policy (Note 2.5)   -    -    -    -    -    (4,307)   (4,307)   -    (4,307)
Balances at January 1, 2018   55,897    160,682    8,165    73,827    7,053    (4,307)   301,317    111    301,428 
                                              
Loss for the year   -    -    -    -    -    (82,380)   (82,380)   (536)   (82,916)
Total comprehensive loss   -    -    -    -    -    (82,380)   (82,380)   (536)   (82,916)
Corporate reorganization   (55,890)   63,444    (8,165)   (73,827)   -    -    (74,438)   -    (74,438)
GA Holding – tax benefit on tax deductible goodwill   -    46,314    -    -    -    -    46,314    -    46,314 
Capital increase – Alfaco   -    3,091    -    -    -    -    3,091    -    3,091 
Issuance of common shares in initial public offering   3    895,179    -    -    -    -    895,182    -    895,182 
Share issuance costs   -    (79,205)   -    -    -    -    (79,205)   -    (79,205)
Non-controlling interest   -    -    -    -    -    -    -    131    131 
Share-based compensation plan   -    -    -    -    60,297    -    60,297    -    60,297 
                                              
Balances at December 31, 2018   10    1,089,505    -    -    67,350    (86,687)   1,070,178    (294)   1,069,884 

 

 

The accompanying notes are part of the consolidated financial statements.

 

 F-4 

 

 

Arco Platform Limited

 

Consolidated statements of changes in equity

For the years ended December 31, 2019, 2018 and 2017

(In thousands of Brazilian reais, unless otherwise stated)

 

   Attributable to equity holders of the parent         
   Share
capital
   Capital
reserve
   Share-based
compensation
reserve
   Accumulated
losses
   Total   Non-controlling
interests
   Total equity 
Balances at December 31, 2018   10    1,089,505    67,350    (86,687)   1,070,178    (294)   1,069,884 
Change in accounting policy (Note 2.5)   -    -    -    (1,251)   (1,251)   -    (1,251)
Balances at January 1, 2019   10    1,089,505    67,350    (87,938)   1,068,927    (294)   1,068,633 
                                    
Loss for the year   -    -    -    (9,431)   (9,431)   -    (9,431)
Total comprehensive loss   -    -    -    (9,431)   (9,431)   -    (9,431)
Corporate reorganization (Note 2.2)   -    (36,624)   -    -    (36,624)   -    (36,624)
Tax benefit on tax deductible goodwill – reversion (Note 19d)   -    (46,314)   -    -    (46,314)   -    (46,314)
Capital increase (Note 19a)   1    13,829    -    -    13,830    -    13,830 
Issuance of common shares in follow-on public offering (Note 1)   -    589,602    -    -    589,602    -    589,602 
Share issuance costs (Note 1)   -    (18,223)   -    -    (18,223)   -    (18,223)
Non-controlling interest   -    -    -    -    -    294    294 
Share-based compensation plan (Note 18)   -    -    33,043    -    33,043    -    33,043 
Restricted stocks transferred   -    15,847    (15,847)   -    -    -    - 
                                    
Balances at December 31, 2019   11    1,607,622    84,546    (97,369)   1,594,810    -    1,594,810 

 

The accompanying notes are part of the consolidated financial statements.

 

 F-5 

 

 

Arco Platform Limited

 

Consolidated statements of cash flows

For the years ended December 31, 2019, 2018 and 2017

(In thousands of Brazilian reais, unless otherwise stated)

 

   2019   2018   2017 
Operating activities               
Profit (loss) before income taxes   (42,534)   (100,901)   66,356 
Adjustments to reconcile profit (loss) before income taxes               
Depreciation and amortization   48,314    19,594    14,288 
Inventory reserves   8,476    7,252    4,481 
Allowance for doubtful accounts   17,392    9,588    5,227 
Loss on sale/disposal of property and equipment and intangible   3,499    138    664 
Fair value change in financial instruments from acquisition interests   (473)   (659)   6,657 
Changes in accounts payable to selling shareholders   89,403    130,378    - 
Share of loss of equity-accounted investees   1,800    792    705 
Changes in fair value of step acquisitions   (3,708)   -    (1,184)
Share-based compensation plan   33,043    60,297    1,890 
Interest accretion on acquisition liabilitiy   42,206    8,704    11,179 
Income from non-cash equivalents   (45,797)   -    - 
Interest on lease liabilities   1,489    -    - 
Provision for legal proceedings   120    131    - 
Provision for payroll taxes (restricted stock units)   8,333    -    - 
Foreign exchange loss   555    34,435    - 
Gain on sale of investment   (3,286)   -    - 
Other financial cost/revenue, net   (1,360)   -    - 
    157,472    169,749    110,263 
Changes in assets and liabilities               
Trade receivables   (136,407)   (57,020)   (24,347)
Inventories   (14,637)   (3,563)   (8,914)
Recoverable taxes   (8,494)   (3,807)   (2,777)
Other assets   (16,035)   (2,254)   (320)
Trade payables   8,455    10,256    (1,512)
Labor and social obligations   15,950    7,169    3,081 
Taxes and contributions payable   1,951    1,476    553 
Advances from customers   19,997    99    3,950 
Other liabilities   (268)   (3,342)   (654)
Cash generated from operations   27,984    118,763    79,323 
                
Income taxes paid   (34,747)   (26,639)   (16,673)
Interest paid on lease liabilities   (852)   -    - 
Net cash flows from (used in) operating activities   (7,615)   92,124    62,650 
                
Investing activities               
Acquisition of property and equipment   (10,991)   (6,854)   (5,314)
Payment of investments and interests in other entities   (41,853)   (2,000)   (19,900)
Acquisition of subsidiaries, net of cash acquired   (798,885)   -    (28,347)
Payment of accounts payable to selling shareholders   -    (14,756)   - 
Acquisition of intangible assets   (43,102)   (29,403)   (6,047)
Purchase of financial investments   277,389    (727,951)   (17,361)
Loans to related parties   (14,000)   -    (300)
Net cash flows used in investing activities   (631,442)   (780,964)   (77,269)
                
Financing activities               
Capital increase   13,830    3,091    86,148 
Capital increase - proceeds from public offering   589,602    895,182    - 
Share issuance costs   (18,897)   (78,531)   - 
Payment of lease liabilities   (4,407)   -    - 
Payment of loans and financing   (563)   -    - 
Loans and financing   97,574    -    - 
Payment to owners to acquire entity’s shares   (928)   -    - 
Dividends paid   -    (85,000)   (75,053)
Net cash flows from financing activities   676,211    734,742    11,095 
                
Foreign exchange effects on cash and cash equivalents   (555)   (34,435)   - 
                
Increase (decrease) in cash and cash equivalents   36,599    11,467    (3,524)
                
Cash and cash equivalents at the beginning of the year   12,301    834    4,358 
Cash and cash equivalents at the end of the year   48,900    12,301    834 
Increase (decrease) in cash and cash equivalents   36,599    11,467    (3,524)

 

The accompanying notes are part of the consolidated financial statements.

 

 F-6 

 

 

 

Notes to the consolidated financial statements

Expressed in thousands of Brazilian reais, unless otherwise stated

 

1Corporate information

 

Arco Platform Limited (“Arco”) is a holding company incorporated under the laws of the Cayman Islands on April 12, 2018 and whose shares are publicly traded on the National Association of Securities Dealers Automated Quotations Payments exchange (NASDAQ) under the ticker symbol “ARCE”. Arco and its subsidiaries are collectively referred to as the Company. Arco became the parent company of Arco Educação S.A. ("Arco Brazil") through the completion of the corporate reorganization and initial public offering of the Company in 2018. Arco Brazil is the holding company of the operating subsidiaries, including EAS Educação S.A. (“EAS”), which provides educational content from basic to secondary education (“K-12 curriculum”).

 

Since 2015, the Company has been investing in technology and its printed methodology evolved to an educational platform, capable of delivering the entire K-12 curriculum content.

 

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

 

The Company has an asset-light, highly scalable business model that emphasizes operational efficiency and profitability. Arco operates through long-term service contracts with private schools. These contracts generally have initial terms that average three years, pursuant to which educational content is provided in printed and digital format to private schools. The revenue is driven by the number of enrolled students at each customer using the solutions and the agreed upon price per student per year, all in accordance with the terms and conditions set forth in each contract. As a result, the Company benefits from high visibility in its net revenue and operating margin, which is calculated by dividing the operating profit by net revenue over a given period.

 

The address of the Company’s principal executive office is 2840 Rua Augusta, 11th Floor, Consolação, São Paulo, Brazil.

 

These consolidated financial statements were authorized for issue by the Board of Directors on March 16, 2020.

 

Follow-on public offering

 

On October 29, 2019, Arco completed a follow-on public offering. The public offering of 7,719,503 Class A common shares, consisted of 4,268,847 Class A common shares offered by certain selling shareholders of Arco (the “Selling Shareholders”), including General Atlantic Arco (Bermuda), L.P. (“GA”), and 3,450,656 Class A common shares offered by Arco. In addition, the underwriters purchased 661,112 Class A common shares, under the 30-day option agreement with GA to purchase up to 1,157,925 additional Class A common shares at the public offering price, less underwriting discounts and commissions. Arco did not receive any proceeds from the sale of Class A common shares by the Selling Shareholders.

 

 F-7 

 

 

The public offering price was US$43.00 per common share, for gross proceeds of US$331.9 million, for both, the selling shareholders and the Company. The Company received net proceeds of US$143,908 (or R$574,767), after deducting US$3,709 (or R$14,835)) in underwriting discounts and commissions. In addition, the Company incurred in the amount of R$ 3,387 for audit, consulting and legal services related to the offering.

 

2Significant accounting policies

 

2.1 Basis for preparation of the consolidated financial statements

 

The Company’s consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).

 

The consolidated financial statements have been prepared on a historical cost basis, except for certain financial assets, derivative financial instruments and contingent consideration from business combinations that have been measured at fair value.

 

Arco is a holding company and considers the currency of the local environment of the operational companies in Brazil as its functional currency, as this is the environment which drives the dividend income it receives, which is its primary source of revenue.

 

Therefore, the functional currency of the Company is the Brazilian real and the consolidated financial statements are presented in Brazilian reais (“BRL” or “R$”). All amounts are rounded to the nearest thousands, except when otherwise indicated.

 

The consolidated financial statements provide comparative information in respect of the previous period.

 

2.2 Significant events during the year

 

During the year ended December 31, 2019, the Company had the following changes in its corporate organization:

 

(a)Internal restructurings

 

Escola de Aplicação São José dos Campos Ltda.

 

On January 2, 2019, the Company agreed to sell its shares of Escola de Aplicação São José dos Campos Ltda., which is part of the Company’s Core segment, to its minority shareholders. 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”). The gain on sale of investment was R$ 3,286, and is classified in Other income (expenses) net in the statement of income.

 

 F-8 

 

 

SAE Digital S.A.

 

On February 1, 2019, EAS spun-off its investment 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 will generate a future tax benefit and a deferred tax asset of R$ 5,135. The deductible goodwill amounts to R$ 14,597. The net effect of R$ 9,462 was accounted for in equity.

 

Novagaúcha Editora e Livraria Ltda.

 

On March 31, 2019, Novagaúcha Editora e Livraria Ltda. was merged by Barra Américas Editora Ltda. The goodwill of this transaction is R$ 4,330 and was charged to equity. No tax benefit was generated in this transaction.

 

NS Ventures Participações Ltda. and NS Educação Ltda.

 

On May 1, 2019, continuing the corporate restructuring, SAE Digital merged NS Educação Ltda. (“NS Educação”) and NS Ventures Participações S.A. (“NS Ventures”). In 2017, when NS Ventures acquired a 30% interest in SAE Digital and a 100% interest in NS Educação, the goodwill was treated as not deductible; however, after this transaction, SAE Digital has the tax benefit of the deductibility of the goodwill, which will generate a future tax benefit and a deferred tax asset of R$ 11,762. The deductible goodwill amounts to R$ 34,594. The net effect of R$ 22,832 was accounted for in equity.

 

NLP Soluções Educacionais Ltda.

 

NLP Soluções Educacionais Ltda. (“Pleno”) is a subsidiary founded in 2019 through the contribution of 100% of the share capital of EAS Educação S.A. which is the subsidiary of Arco Brazil, its parent company. Pleno’s corporate purpose is to provide content to develop socio-emotional skills.

 

(b)Acquisition of investments

 

Nave à Vela Ltda.

 

In May 2019, the Company acquired a 13.2% interest in Nave à Vela Ltda. (“Nave”) and such investment was accounted for under the equity method through October 2019, when the Company acquired control and Nave became a consolidated subsidiary of the Company with 51.0% interest in the share capital of Nave. See Note 4b.

 

 F-9 

 

 

EEM Licenciamento de Programas Educacionais Ltda.

 

On April 29, 2019, the Company acquired the control of EEM Licenciamento de Programas Educacionais Ltda. (“EEM”) by acquiring 100% of its outstanding ordinary shares and voting interests as described in Note 4a.

 

Sistema Positivo de Ensino

 

On May 7, 2019, the Company announced that it 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. Positivo is composed of seven entities as follows: Positivo Soluções Didáticas Ltda., Editora Piá Ltda., Osterreich Investimentos – Participações Societárias S.A., Mendel Investimentos – Participações Societárias S.A., Torino Investimentos – Participações Societárias S.A., Remare Investimentos – Participações Societárias S.A., Fahe Investimentos – Participações Societárias S.A.

 

On November 1, 2019 the Company concluded the transaction through its subsidiary EAS and, on the same date, acquired control of Positivo. See Note 4c.

 

Geekie Desenvolvimento de Softwares S.A.

 

In 2019, Arco acquired an additional 31% interest in the share capital of Geekie through a capital increase and the purchase of minority shareholders increasing its total interest to 37.5% as descried in Note 11.

 

 F-10 

 

 

2.3 Basis of consolidation and investments in associates and joint ventures

 

The consolidated financial statements comprise the financial statements of the Company as of December 31, 2019 and 2018 and for the years ended December 31, 2019, 2018 and 2017.

 

The table below is a list of the Company’s subsidiaries, associates and joint venture:

 

            Direct and indirect interest 
Name  Principal
activities
  Country  Investment
type
  2019   2018   2017 
Arco Educação S.A.  Holding  Brazil  Subsidiary   100.0%   100.0%   - 
EAS Educação S.A.  Educational content  Brazil  Subsidiary   100.0%   100.0%   100.0%
Barra Américas Editora Ltda.  Educational content  Brazil  Subsidiary   100.0%   100.0%   100.0%
Distribuidora de Material Didático Desterro Ltda.  Educational content  Brazil  Subsidiary   100.0%   100.0%   100.0%
Novagaúcha Editora e Livraria Ltda.  Educational content  Brazil  Subsidiary   -    100.0%   100.0%
SAS Sistema de Ensino Ltda.  Educational content  Brazil  Subsidiary   100.0%   100.0%   100.0%
Arco Ventures S.A.  Educational content  Brazil  Subsidiary   100.0%   100.0%   100.0%
SAS Livrarias Ltda.  Educational content  Brazil  Subsidiary   100.0%   100.0%   100.0%
SAE Digital S.A.  Educational content  Brazil  Subsidiary   100.0%   100.0%   100.0%
Escola de Aplicação São José dos Campos Ltda.  Educational services  Brazil  Subsidiary   -    69.6%   69.6%
International School Serviços de Ensino, Treinamento e Editoração, Franqueadora S.A.  Educational content  Brazil  Subsidiary   51.5%   51.5%   51.5%
NS Ventures Participações Ltda.  Educational content  Brazil  Subsidiary   -    100.0%   100.0%
NS Educação Ltda.  Educational content  Brazil  Subsidiary   -    100.0%   100.0%
Nave à Vela Ltda.  Educational content  Brazil  Subsidiary   51.0%   -    - 
EEM Licenciamento de Programas Educacionais Ltda.  Educational technology  Brazil  Subsidiary   100.0%   -    - 
NLP Soluções Educacionais Ltda.  Educational content  Brazil  Subsidiary   100.0%   -    - 
Sistema Positivo de Ensino  Educational content  Brazil  Subsidiary   100.0%   -    - 
WPensar S.A.  Educational technology  Brazil  Joint venture   25.0%   25.0%   25.0%
Geekie Desenvolvimento de Softwares S.A.  Educational technology  Brazil  Associate   37,5%   8.05%   6.5%

 

Control is achieved when the Company is exposed to, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and ceases when the Company loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in

the consolidated financial statements from the date the Company gains control until the date the Company ceases control of the subsidiary.

 

 F-11 

 

 

Where necessary, adjustments are made to the financial statements of subsidiaries to bring their accounting policies in line with the Company’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions, and any unrealized income and expenses arising from intra-group transactions, are eliminated in full on consolidation.

 

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Company loses control over a subsidiary, it derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, and any resulting gain or loss is recognized in profit or loss.

 

Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statements of income (loss) and comprehensive income (loss), changes in equity and financial position, respectively.

 

2.4 Summary of significant accounting policies

 

This note provides a description of the significant accounting policies adopted in the preparation of these consolidated financial statements in addition to other policies that have been disclosed in other notes to these consolidated financial statements. These policies have been consistently applied to all periods presented, unless otherwise stated.

 

a) Business combinations and goodwill

 

Business combinations are accounted for using the acquisition method. The cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value, and the amount of any non-controlling interests in the acquiree. For each business combination, the Company elects whether to measure the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets. Acquisition-related costs are expensed as incurred and included in general and administrative expenses.

 

When the Company acquires a business, it assesses the financial assets and liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions as of the acquisition date.

 

Any contingent consideration to be transferred by the acquirer is recognized at fair value at the acquisition date. Contingent consideration classified as an asset or liability that is a financial instrument and within the scope of IFRS 9 Financial Instruments, is measured at fair value with the changes in fair value recognized in the statement of income (loss) in accordance with IFRS 9. Other contingent consideration that is not within the scope of IFRS 9 is measured at fair value at each reporting date with changes in fair value recognized in profit or loss.

 

 F-12 

 

 

Goodwill is initially measured at cost (being the excess of the aggregate of the consideration transferred and the amount recognized for non-controlling interests and any previous interest held over the net identifiable assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred, the Company re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an excess of the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in profit or loss.

 

After initial recognition, goodwill is measured at cost less any accumulated impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated to each segment that is expected to benefit from the combination.

 

Where goodwill has been allocated to a segment and part of the operation within that segment is disposed of, the goodwill associated with the disposed operation is included in the carrying amount of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative values of the disposed operation and the portion of the segment unit retained.

 

The current Brazilian tax law allows the deductibility of the acquisition date goodwill and fair value of net assets acquired when a corporate reorganization occurs after acquisition by the Company (i.e. when the Company merges or spins off the businesses acquired). Until such action occurs, the tax and accounting bases of the net assets acquired are the same as of the acquisition date and no deferred tax effects are recognized.

 

Certain acquired subsidiaries utilize the presumed profit regime as described in Note 24.a to calculate income taxes. Under this regime, there is no difference between the carrying amount and related tax basis of assets and liabilities and therefore no deferred income taxes were recorded in these financial statements at acquisition date or any subsequent periods.

 

b) Investment in associates and joint venture

 

An associate is an entity over which the Company has significant influence. Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control over those policies.

 

A joint venture is a type of joint arrangement whereby the parties that have joint control of the arrangement have rights to the net assets of the joint venture. Joint control is the contractually agreed sharing of control of an arrangement, which exists only when decisions about the relevant activities require the unanimous consent of the parties sharing control.

 

The considerations made in determining significant influence or joint control are similar to those necessary to determine control over subsidiaries. The Company’s investments in its associate and joint venture are accounted for using the equity method.

 

Under the equity method of accounting, the investment in an associate or a joint venture is initially recognized at cost. The carrying amount of the investment is adjusted to recognize changes in the Company’s share of net assets of the associate or joint venture since the acquisition date. Goodwill relating to the associate or joint ventures is included in the carrying amount of the investment and is not tested for impairment separately.

 

 F-13 

 

 

The statement of income (loss) reflects the Company’s share of the results of operations of the associate or joint venture. In addition, when there has been a change recognized directly in the equity of the associate or joint venture, the Company recognizes its share of any changes, when applicable, in the statement of changes in equity.

 

Unrealized gains and losses resulting from transactions between the Company and the associate or joint venture are eliminated to the extent of the interest in the associate or joint venture.

 

The aggregate of the Company’s share of profit or loss of an associate and a joint venture is shown on the face of the statement of income (loss) outside operating profit and represents profit or loss after tax of the associate or joint venture.

 

The financial statements of the associate or joint venture are prepared for the same reporting period as the Company. When necessary, adjustments are made to bring the accounting policies in line with those of the Company.

 

After application of the equity method, the Company determines whether it is necessary to recognize an impairment loss on its investment in its associate or joint venture. At each reporting date, the Company determines whether there is objective evidence that the investment in the associate or joint venture is impaired. If there is such evidence, the Company calculates the amount of impairment as the difference between the recoverable amount of the associate or joint venture and its carrying value, and then recognizes the loss within share of profit (loss) of equity-accounted investees in the statement of income (loss).

 

c) Current versus non-current classification

 

The Company presents assets and liabilities in the statement of financial position based on current/non-current classification. An asset is current when it is:

 

·Expected to be realized or intended to be sold or consumed in the normal operating cycle;
·Held primarily for the purpose of trading;
·Expected to be realized within twelve months after the reporting period; or
·Cash or cash equivalent unless restricted from being exchanged or used to settle a liability for at least twelve months after the reporting period.

 

All other assets are classified as non-current.

 

 F-14 

 

 

A liability is current when:

 

·It is expected to be settled in the normal operating cycle;
·It is held primarily for the purpose of trading;
·It is due to be settled within twelve months after the reporting period; or
·There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period.

 

The terms of the liability that could, at the option of the counterparty, result in its settlement by the issue of equity instruments do not affect its classification.

 

The Company classifies all other liabilities as non-current.

 

Deferred tax assets and liabilities are classified as non-current assets and liabilities.

 

d) Fair value measurement

 

The Company measures financial instruments such as certain financial investments and derivatives at fair value at each balance sheet date.

 

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either:

 

·in the principal market for the asset or liability; or
·in the absence of a principal market, in the most advantageous market for the asset or liability.

 

The principal or the most advantageous market must be accessible by the Company.

 

The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.

 

A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market participant that would use the asset in its highest and best use.

 

The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the use of unobservable inputs.

 

All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that is significant to the fair value measurement as a whole:

 

·Level 1 — Quoted (unadjusted) market prices in active markets for identical assets or liabilities.

 

 F-15 

 

 

·Level 2 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable.
·Level 3 — Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable.

 

For assets and liabilities that are recognized in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period.

 

At each reporting date, the Company analyzes the movements in the values of assets and liabilities which are required to be remeasured or re-assessed as per the Company’s accounting policies. For this analysis, the Company verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation to contracts and other relevant documents.

 

The Company also compares the change in the fair value of each asset and liability with relevant external sources to determine whether the change is reasonable.

 

For the purpose of fair value disclosures, the Company has determined classes of assets and liabilities based on the nature, characteristics and risks of the asset or liability and the level of the fair value hierarchy, as explained above.

 

e) Financial instruments – initial recognition and measurement

 

A financial instrument is any contract that gives rise to a financial asset of one entity and a financial liability or equity instrument of another entity.

 

f) Financial assets

 

Initial recognition and measurement

 

Financial assets are classified, at initial recognition, as subsequently measured at amortized cost, fair value through other comprehensive income (OCI), and fair value through profit or loss.

 

The classification of financial assets at initial recognition depends on the financial asset’s contractual cash flow characteristics and the Company’s business model for managing them. With the exception of trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient, the Company initially measures a financial asset at its fair value plus, in the case of a financial asset not at fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which the Company has applied the practical expedient are measured at the transaction price under IFRS 15.

 

 F-16 

 

 

 

For a financial asset to be classified and measured at amortized cost or fair value through other comprehensive income (OCI), it should give rise to cash flows that are ‘solely payments of principal and interest (SPPI)’ on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed at an instrument level. Financial assets with cash flows that are not SPPI are classified and measured at fair value through profit or loss, irrespective of the business model.

 

The Company’s business model for managing financial assets refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result from collecting contractual cash flows, selling the financial assets, or both. Financial assets classified and measured at amortized cost are held within a business model with the objective to hold financial assets in order to collect contractual cash flows while financial assets classified and measured at fair value through OCI are held within a business model with the objective of both holding to collect contractual cash flows and selling.

 

Purchases or sales of financial assets that require delivery of assets within a time frame established by regulation or convention in the marketplace (regular way trades) are recognized on the trade date, i.e., the date that the Company commits to purchase or sell the asset.

 

Subsequent measurement

 

For purposes of subsequent measurement, financial assets are classified as: amortized cost or fair value through profit or loss. There are no financial assets designated as fair value through OCI.

 

Financial assets at amortized cost

 

Financial assets at amortized cost are subsequently measured using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognized in profit or loss when the asset is derecognized, modified or impaired.

 

The Company’s financial assets at amortized cost include trade receivables and certain financial investments.

 

Financial assets at fair value through profit or loss

 

Financial assets at fair value through profit or loss are carried in the statement of financial position at fair value with net changes in fair value recognized in the statement of profit or loss. This category includes derivative instruments.

 

A derivative embedded in a hybrid contract, with a financial liability or non-financial host, is separated from the host and accounted for as a separate derivative if: the economic characteristics and risks are not closely related to the host; a separate instrument with the same terms as the embedded derivative would meet the definition of a derivative; and the hybrid contract is not measured at fair value through profit or loss. Embedded derivatives are measured at fair value with changes in fair value recognized in profit or loss. Reassessment only occurs if there is either a change in the terms of the contract that significantly modifies the cash flows that would otherwise be required or a reclassification of a financial asset out of the fair value through profit or loss category.

 

 F-17 

 

 

Derecognition

 

A financial asset (or, where applicable, a part of a financial asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Company’s consolidated statement of financial position) when:

 

·The rights to receive cash flows from the asset have expired; or

·The Company has transferred its rights to receive cash flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under a ‘pass-through’ arrangement-and either (a) the Company has transferred substantially all the risks and rewards of the asset, or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control of the asset.

 

When the Company has transferred its rights to receive cash flows from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards of ownership. When it has neither transferred nor retained substantially all the risks and rewards of the asset, nor transferred control of the asset, the Company continues to recognize the transferred asset to the extent of its continuing involvement. In that case, the Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects the rights and obligations that the Company has retained.

 

Continuing involvement that takes the form of a guarantee over the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that the Company could be required to repay.

 

Impairment

 

Further disclosures relating to impairment of financial assets are also provided in the following notes:

 

·Disclosures for significant assumptions - Note 3

·Trade receivables, including contract assets - Note 7

 

The Company recognizes an allowance for expected credit losses (ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual cash flows due in accordance with the contract and all the cash flows that the Company expects to receive, discounted at an approximation of the original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements that are integral to the contractual terms.

 

For trade receivables, the Company applies a simplified approach in calculating ECLs. Therefore, the Company does not track changes in credit risk, but instead recognizes a loss allowance based on lifetime ECLs at each reporting date. The Company has established a provision matrix that is based on its historical credit loss experience, adjusted for forward-looking factors specific to the debtors and the economic environment.

 

 F-18 

 

 

The Company considers a financial asset in default when contractual payments are 360 days past due. However, in certain cases, the Company may also consider a financial asset to be in default when internal or external information indicates that the Company is unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by the Company. A financial asset is written off when there is no reasonable expectation of recovering the contractual cash flows.

 

g) Financial liabilities

 

Initial recognition and measurement

 

Financial liabilities are classified, at initial recognition, as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging instruments in an effective hedge, as appropriate.

 

All financial liabilities are recognized initially at fair value and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.

 

The Company’s financial liabilities include trade payables, loans and borrowings, financial instruments from acquisition of interests and accounts payable to selling shareholders.

 

Subsequent measurement

 

For purposes of subsequent measurement, financial liabilities are classified in two categories:

 

·Financial liabilities at fair value through profit or loss

·Financial liabilities at amortized cost (loans and borrowings)

 

Financial liabilities at fair value through profit or loss

 

Financial liabilities at fair value through profit or loss include financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or loss.

 

Financial liabilities are classified as held for trading if they are incurred for the purpose of repurchasing in the near term. This category also includes derivative financial instruments entered by the Company that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Separated embedded derivatives are also classified as held for trading unless they are designated as effective hedging instruments.

 

Gains or losses on liabilities held for trading are recognized in the statement of income (loss).

 

 F-19 

 

 

Financial liabilities designated upon initial recognition at fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied.

 

Financial liabilities at amortized cost (loans and borrowings)

 

After initial recognition, interest-bearing loans and borrowings are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in profit or loss when the liabilities are derecognized as well as through the EIR amortization process.

 

Amortized cost is calculated by considering any discount or premium on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance costs in the statement of income (loss).

 

Derecognition

 

A financial liability is derecognized when the obligation under the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying amounts is recognized in the statement of income (loss).

 

h) Offsetting of financial instruments

 

Financial assets and financial liabilities are offset and the net amount is reported in the consolidated statement of financial position if there is a currently enforceable legal right to offset the recognized amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously.

 

i) Derivative financial instruments

 

Initial recognition and subsequent measurement

 

The Company has derivative financial instruments from call and put options from acquisitions of subsidiaries, associates and joint venture. Such derivative financial instruments are initially recognized at fair value on the date on which a derivative contract is entered into and are subsequently remeasured at fair value. Derivatives are carried as financial assets when the fair value is positive and as financial liabilities when the fair value is negative.

 

Any gains or losses arising from changes in the fair value of derivatives are recorded directly to finance result.

 

j) Cash and cash equivalents

 

Cash and cash equivalents in the statement of financial position comprise cash at banks and on hand and short-term financial investments with an original maturity of three months or less, which are subject to an insignificant risk of changes in value.

 

 F-20 

 

 

For the purpose of the consolidated statement of cash flows, cash and cash equivalents consist of cash and short-term financial investments, as they are considered an integral part of the Company’s cash management.

 

k) Inventories

 

Inventories are measured at the lower of cost and net realizable value. The costs of inventories are based on the average cost method and include costs incurred on the purchase of inventories, editorial production costs and other costs incurred in bringing them to their current location and condition. Costs of purchased inventory are determined after deducting any discounts and recoverable taxes.

 

Educational content in progress is considered as inventories in progress and comprises the costs incurred to create unfinished educational content. This amount is measured based on the allocation of hours incurred by editorial production employees in the preparation of educational content.

 

The inventory reserve for educational material is calculated based on their expected net realizable value. Inventory reserve corresponds to a reserve for inventory obsolescence and is recorded in cost of sales. It is estimated based on the amount of educational materials from prior collections which are no longer used for sale and educational materials which the Company expects will not be sold based on the actual sales. In determining the inventory reserve, the Company considers management’s current assessment of the marketplace, industry trends and projected product demand as compared to the number of units currently in stock.

 

l) Property and equipment

 

Property and equipment is stated at cost, net of accumulated depreciation and accumulated impairment losses, if any.

 

Subsequent expenditure is capitalized only if it is probable that the future economic benefits associated with the expenditure will flow to the Company.

 

Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets, as follows:

 

Machinery and equipment 10%
Vehicles 20%
Furniture and fixtures 10%
IT equipment 20%
Facilities 10%
Leasehold improvements 20% to 33%

 

An item of property and equipment and any significant part initially recognized is derecognized upon disposal or when no future economic benefits are expected from its use or disposal. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income (loss) when the asset is derecognized.

 

 F-21 

 

 

The residual values, useful lives and methods of depreciation of property and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate.

 

m) Leases

 

The Company assesses at contract inception whether a contract is, or contains, a lease. That is, if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

 

Company as a lessee

 

The Company applies a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The Company recognizes lease liabilities to make lease payments and right-of-use assets representing the right to use the underlying assets.

 

Right-of-use assets

 

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

 

Buildings 1 to 10 years
Equipment 4 years

 

If ownership of the leased asset transfers to the Company at the end of the lease term or the cost reflects the exercise of a purchase option, depreciation is calculated using the estimated useful life of the asset. Right-of use assets are subject to impairment.

 

Lease liabilities

 

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

 

 F-22 

 

 

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

 

Short-term leases and leases of low-value assets

 

The Company applies the short-term lease recognition exemption to its short-term leases of properties (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases of office equipment that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.

 

n) Intangible assets

 

Intangible assets acquired separately are measured on initial recognition at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses. Internally generated intangibles are not capitalized, and the related expenditure is reflected in profit or loss in the period in which the expenditure is incurred.

 

The Company capitalizes the costs directly related with the development of the educational platforms used to deliver content. These costs are substantially comprised of technology related services and payroll expenses, recorded as internally developed software in the educational platform accounting ledger. Development expenditure is capitalized only if the expenditure can be measured reliably, the product or process is technically and commercially feasible, future economic benefits are probable, and the Company intends to and has sufficient resources to complete development and to use or sell the asset. Otherwise, it is recognized in statement of income (loss) as incurred. Subsequent to initial recognition, development expenditure is measured at cost less accumulated amortization and any accumulated impairment losses.

 

Costs associated with maintaining internally developed software are recognized as an expense as incurred.

 

The useful lives of intangible assets are assessed as finite.

 

Intangible assets with finite lives are amortized over the useful economic life and assessed for impairment whenever there is an indication that the intangible asset may be impaired. The amortization period and the amortization method for an intangible asset with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortization period or method, as appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized in the statement of income (loss) in the expense category that is consistent with the function of the intangible assets.

 

 F-23 

 

 

An intangible asset is derecognized upon disposal (i.e., at the date the recipient obtains control) or when no future economic benefits are expected from its use or disposal. Any gain or loss arising upon derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income (loss).

 

o) Impairment of non-financial asset

 

Further disclosures relating to impairment of non-financial assets are also provided in the following notes:

 

·Disclosures for significant assumptions - Note 3

·Property and equipment - Note 12

·Intangible assets - Note 14

·Goodwill and intangible assets with indefinite lives - Note 14

 

The Company assesses, at each reporting date, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.

 

In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining fair value less costs of disposal, recent market transactions are taken into account. If no such transactions can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices for publicly traded companies or other available fair value indicators.

 

The Company bases its impairment calculation on detailed budgets and forecast calculations, which are prepared separately for each of the Company’s CGUs to which the individual assets are allocated. These budgets and forecast calculations generally cover a period of five years. A long-term growth rate is calculated and applied to project future cash flows after the fifth year.

 

Impairment losses of continuing operations are recognized in the statement of income (loss) in expense categories consistent with the function of the impaired asset.

 

For assets excluding goodwill, an assessment is made at each reporting date to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication exists, the Company estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years. Such reversal is recognized in the statement of income (loss).

 

 F-24 

 

 

Goodwill is tested for impairment annually as at December 31 and when circumstances indicate that the carrying value may be impaired. An operating segment is the lowest level within the Company at which the goodwill is monitored for internal management purposes and therefore impairment tests of goodwill have been carried out at each operating segment level. Impairment is determined for goodwill by assessing the recoverable amount of each operating segment to which the goodwill relates. When the recoverable amount is less than its carrying amount, an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.

 

p) Provisions

 

Provisions are recognized when the Company has a present obligation (legal or constructive) as a result of past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. The expense relating to a provision is presented in the statement of income (loss) net of any reimbursement, when applicable.

 

q) Cash dividend

 

The Company recognizes a liability to pay a dividend when the distribution is authorized, and the distribution is no longer at the discretion of the Company. The distribution is authorized when it is required to pay a dividend of the profit for the year in accordance with the Company’s Articles of Association or is approved by the shareholders. A corresponding amount is recognized directly in equity.

 

r) Labor and social obligations

 

Labor and social obligations are expensed as the related service is provided. A liability is recognized for the amount expected to be paid if the Company has a present legal or constructive obligation to pay this amount as a result of past service provided by the employee and the obligation can be estimated reliably.

 

s) Share-based payments

 

Certain key executives of the Company receive remuneration in the form of share-based compensation, whereby the executives render services as consideration for equity instruments (equity-settled transactions).

 

The expenses of equity-settled transactions are determined by the fair value at the date when the grant is made using an appropriate valuation model. That expense is recognized in general and administrative expenses, together with a corresponding increase in equity (share-based compensation reserve), over the period in which the service and, where applicable, the performance conditions are fulfilled (the vesting period). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date reflects the extent to which the vesting period has expired and the best estimate of the number of equity instruments that will ultimately vest. The expense or credit in the statement of income (loss) for a period represents the movement in cumulative expense recognized as at the beginning and end of that period.

 

 F-25 

 

 

Service and non-market performance conditions are not taken into account when determining the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Company’s best estimate of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions. Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award unless there are also service and/or performance conditions.

 

No expense is recognized for awards that do not ultimately vest because non-market performance and/or service conditions have not been met. Where awards include a market or non-vesting condition, the transactions are treated as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance and/or service conditions are satisfied.

 

When the terms of an equity-settled award are modified, the minimum expense recognized is the grant date fair value of the unmodified award, provided the original vesting terms of the award are met. An additional expense, measured as at the date of modification, is recognized for any modification that increases the total fair value of the share-based payment transaction, or is otherwise beneficial to the employee. Where an award is cancelled by the entity or by the counterparty, any remaining element of the fair value of the award is expensed immediately through profit or loss.

 

The dilutive effect of outstanding options is reflected as additional share dilution in the computation of diluted earnings per share.

 

t) Revenue from contracts with customers

 

Revenue from sale of education content

 

The Company sells educational content to private schools, which is delivered through printed and digital formats to private school. Revenue from contracts with customers is recognized when control of the goods or services are transferred to the customer at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services., i.e., at the moment it delivers the content to private schools in printed and digital format. The technology is provided solely in support of the best use of its content. Both printed and digital content are the same.

 

The digital content, including its features, is provided with the purpose of supporting the printed content, and it includes video lessons, online homework and assessments that are not customized and have no stand-alone value if used separately or outside of the main context. The digital content and related features are an evolution from a totally printed methodology to a broader approach and will continue to evolve and change in the coming years but are currently still deeply entwined with the printed content.

 F-26 

 

 

The Company generates substantially all its revenue from contracts that have an average term of three years, pursuant to which the Company provides educational content in printed and digital format to private schools. The Company’s revenue is driven by the number of enrolled students at each customer using the solutions and the agreed price per student per year, all in accordance with the terms and conditions set forth in each contract. Each contract contemplates penalties ranging between 20% to 100% of the remaining total value of the contract in the event of termination. However, the content already delivered to the private schools is not returned to the Company unless the return conditions in the following paragraph are met.

 

Pursuant to the terms of the contracts with the schools, they are required, by the end of November of each year, to provide the Company with an estimate of the number of enrolled students that will access the content in the next school year (which typically starts in February of the following year), allowing the Company to start the delivery of its educational content. Since the contracts with the schools allows product returns or increase in the number of enrolled students up to a certain limit, the Company recognizes revenue for the amount that is expected to be received based on past experience, assuming that the other conditions for revenue recognition are met. A right of return asset (and corresponding adjustment to cost of sales) is also recognized for the right to recover the goods from the customer.

 

The asset is measured at the former carrying amount of the inventory, less any expected costs to recover the goods and any potential decreases in value. The Company updates the measurement of the asset for any revisions to the expected level of returns and any additional decreases in the value of the returned products.

 

Interest income

 

For all financial instruments measured at amortized cost, interest income is recorded using the EIR method. The EIR is the rate that exactly discounts the estimated future cash receipts over the expected life of the financial instrument or a shorter period, where appropriate, to the net carrying amount of the financial asset. Interest income includes also gain from financial investments classified as financial assets at fair value through profit or loss. Interest income is included in finance income in the statement of income (loss).

 

u) Taxes

 

Current income tax

 

Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date.

 

Management periodically evaluates positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.

 

 F-27 

 

 

Deferred tax

 

Deferred tax is provided using the liability method on temporary differences between the tax bases of assets and liabilities and their carrying amounts for financial reporting purposes at the reporting date.

 

Deferred tax liabilities are recognized for all taxable temporary differences, except:

 

·When the deferred tax liability arises from the initial recognition of goodwill or an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss;

 

·In respect of taxable temporary differences associated with investments in subsidiaries, associates and interests in joint venture, when the timing of the reversal of the temporary differences can be controlled and it is probable that the temporary differences will not reverse in the foreseeable future.

 

Deferred tax assets are recognized for all deductible temporary differences, the carry forward of unused tax credits and any unused tax losses. Deferred tax assets are recognized to the extent that it is probable that taxable profit will be available against which the deductible temporary differences, and the carry forward of unused tax credits and unused tax losses can be utilized, except:

 

·When the deferred tax asset relating to the deductible temporary difference arises from the initial recognition of an asset or liability in a transaction that is not a business combination and, at the time of the transaction, affects neither the accounting profit nor taxable profit or loss;

 

·In respect of deductible temporary differences associated with investments in subsidiaries, associates and interests in joint venture, deferred tax assets are recognized only to the extent that it is probable that the temporary differences will reverse in the foreseeable future and taxable profit will be available against which the temporary differences can be utilized.

 

The carrying amount of deferred tax assets is reviewed at each reporting date and reduced to the extent that it is no longer probable that sufficient taxable profit will be available to allow all or part of the deferred tax asset to be utilized. Unrecognized deferred tax assets are re-assessed at each reporting date and are recognized to the extent that it has become probable that future taxable profits will allow the deferred tax asset to be recovered.

 

Deferred tax assets and liabilities are measured at the tax rates that are expected to apply in the year when the asset is realized or the liability is settled, based on tax rates (and tax laws) that have been enacted or substantively enacted at the reporting date.

 

The Company offsets deferred tax assets and deferred tax liabilities if and only if it has a legally enforceable right to set off current tax assets and current tax liabilities and the deferred tax assets and deferred tax liabilities relate to income taxes levied by the same taxation authority on either the same taxable entity or different taxable entities which intend either to settle current tax liabilities and assets on a net basis, or to realize the assets and settle the liabilities simultaneously, in each future period in which significant amounts of deferred tax liabilities or assets are expected to be settled or recovered.

 

 F-28 

 

 

2.5Changes in accounting policies and disclosures

 

Except for new standards IFRS 16 and IFRIC 23, which are discussed below, the other amendments to standards that apply from January 1, 2019 are primarily clarifications and none required a change in the Company’s accounting policies.

 

Additionally, the Company has not early adopted any new standards, amendments or interpretations that are effective after December 31, 2019. It does not expect that these standards, amendments or interpretations will have a material effect on the Company’s financial statements.

 

New and amended IFRS standards and interpretations that are effective beginning on January 1, 2019

 

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 recognize most leases on the balance sheet.

 

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 in retained earnings 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   18,225 
Deferred tax assets   613 
Total assets   18,838 
      
Liabilities     
Lease liabilities   20,089 
Total liabilities   20,089 
      
Total adjustment on equity:     
Retained earnings   (1,251)

 

 F-29 

 

 

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 have 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. 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 and low-value assets exemptions to leases 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.

 

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

 

Operating lease commitments as at December 31, 2018   27,397 
Weighted average incremental borrowing rate as at January 1, 2019   11.04%
Discounted operating lease commitments at January 1, 2019   20,642 
Less:     
Commitments related to sale of Escola de Aplicação São José dos Campos Ltda.   (553)
Lease liabilities as at January 1, 2019   20,089 

 

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).

 

 F-30 

 

 

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 must 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 should be followed.

 

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

 

Upon adoption of the Interpretation, the Company considered whether it has any uncertain tax positions. The Company applied the interpretation and concluded, based on its tax compliance that it is probable that its tax treatments will be accepted by the taxation authorities and did not have a significant impact on the consolidated financial statements.

 

3Significant accounting judgements, estimates and assumptions

 

The preparation of the Company’s consolidated financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities, and the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of assets or liabilities affected in future periods. Accounting estimates and judgments are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to estimates are recognized prospectively.

 

Other disclosures relating to the Company’s exposure to risks and uncertainties includes:

 

·Capital management - Note 27

·Financial instruments risk management – Notes 26 and 27

·Sensitivity analyses disclosures - Note 27

 

 F-31 

 

 

Estimates and assumptions

 

The key assumptions about the future and other key sources of estimated uncertainty as of the reporting date that include a significant risk of a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Company based its assumptions and estimates on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances that arise and that are beyond the Company’s control. Such changes are reflected in the assumptions where they occur.

 

Impairment of non-financial assets

 

Impairment exists when the carrying value of an asset or cash generating unit (“CGU”) or group of CGU exceeds its recoverable amount, defined as the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on data available from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs of disposing of the asset. The value in use calculation is based on a discounted cash flow model (“DCF” model). The cash flows are derived from the budget for the next five years and do not include restructuring activities to which the Company has not yet committed or significant future investments that will enhance the performance of the assets of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as well as to expected future cash-inflows and the growth rate used for extrapolation purposes. The Company determined that its operating segment is the cash generating unit. These estimates are most relevant to goodwill that are recognized by the Company. The key assumptions used to determine the recoverable amount for the different operating segments, including a sensitivity analysis, are disclosed and further explained in Note 14.

 

Provision for expected credit losses of trade receivables and contract assets

 

The Company uses a provision matrix to calculate ECLs for trade receivables and contract assets. The provision rates are based on days past due for customer. The provision matrix is initially based on the Company’s historical observed default rates. The Company calibrates the matrix to adjust the historical credit loss experience with forward-looking information.

 

The assessment of the correlation between historical observed default rates, forecast economic conditions and ECLs is a significant estimate. The amount of ECLs is sensitive to changes in circumstances and of forecast economic conditions. The Company’s historical credit loss experience and forecast of economic conditions may also not be representative of customer’s actual default in the future. The information about the ECLs on the Company’s trade receivables and contract assets is disclosed in Note 7.

 

Share-based payment

 

Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination of the most appropriate inputs to the valuation model including the expected life of the share option or appreciation right, volatility and dividend yield and making assumptions about them. For the measurement of the fair value of equity-settled transactions, the Company uses the Black & Scholes model. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed in Note 18b.

 

 F-32 

 

 

Taxes

 

Deferred tax assets are recognized for deductible temporary differences and unused tax credits from net operating losses carryforward to the extent that it is probable that taxable profit will be available against which the losses can be utilized. Significant management judgement is required to determine the amount of deferred tax assets that can be recognized, based upon the likely timing and the level of future taxable profits, together with future tax planning strategies.

 

The Company has R$ 4,066 (2018: R$ 10,427) of unrecognized unused tax loss carryforwards as of December 31, 2019 related to a subsidiary that has a history of losses. Such unused tax loss carryforwards do not expire and may not be used to offset taxable income of other subsidiaries of the Company. See Note 24.

 

Fair value measurement of financial instruments

 

When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the DCF model. The inputs into these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required to estimate fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments. See Note 26 for further disclosures.

 

Contingent consideration, resulting from business combinations, is valued at fair value as of the acquisition date as part of the business combination. When the contingent consideration meets the definition of a financial liability, it is subsequently remeasured at each reporting date. This determination of fair value is based on discounted cash flows. The key assumptions taken into consideration are the probability of meeting each performance target and the discount factor (see Notes 6 and 26 for additional information).

 

Any contingent consideration is classified as financial instruments from acquisition of interests (see Note 16).

 

 F-33 

 

 

4Business combinations and acquisition of non-controlling interests

 

The fair value of the identifiable assets and liabilities as of the date of each acquisition was:

 

   Fair value as of the acquisition date 
   2019   2017 
   EEM   Nave   Positivo   NS
Educação
   International School 
Assets                         
Cash and cash and equivalents   219    1,565    37,635    1    689 
Trade receivables   126    896    72,780    -    10,576 
Inventories   -    897    13,664    -    1,837 
Recoverable taxes   12    7    99    -    173 
Deferred taxes   -    -    7,518    -    - 
Other assets   14    284    1,526    -    470 
Property and equipment   80    292    4,760    -    323 
Right-of-use assets   -    -    5,241    -    - 
Intangible assets   5,866    19,009    773,134    9,707    29,736 
    6,317    22,950    916,357    9,708    43,804 
                          
Liabilities                         
Trade payables   (48)   (271)   (12,463)   -    (2,327)
Labor and social obligations   (240)   (1,444)   (29,607)   -    (696)
Taxes and contributions payable   (109)   (50)   (2,937)   -    (119)
Income taxes payable   -    (2)   (22,643)   -    (410)
Leases   -    -    (5,374)   -    - 
Loans and financing   (548)   -    -    -    - 
Other liabilities   (156)   (546)   -    -    (340)
    (1,101)   (2,313)   (73,024)   -    (3,892)
Total identifiable net assets at fair value   5,216    20,637    843,333    9,708    39,912 
Goodwill arising on acquisition   13,069    37,557    830,028    28,826    27,598 
Purchase consideration transferred   18,285    58,194    1,673,361    38,534    67,510 
Cash paid   16,355    21,098    800,851    29,037    - 
Capital contribution   -    -    -    -    5,300 
Forward contract of controlling interest at acquisition   -    29,728    -    -    30,144 
Retained payments   1,930    -    872,510    -    - 
Deferred payments   -    -    -    9,497    - 
Fair value of previously held interest in a step acquisition   -    7,368    -    -    32,066 
Analysis of cash flows on acquisition:                         
Transaction costs of the acquisition (included in cash flows from operating activities)   (649)   (467)   (27,389)   (498)   (85)
Cash paid and subscribed capital net of cash acquired with the subsidiary (included in cash flows from investing activities)   (16,136)   (19,533)   (763,216)   (29,036)   689 

 

 

(a)

EEM Licenciamento de Programas Educacionais S.A. (“Escola em Movimento”)

 

On April 29, 2019, the Company agreed to acquire control of Escola em Movimento, by acquiring 100% of its outstanding ordinary shares and voting interests. The Company acquired Escola em Movimento to expand both its existing product portfolio and customer base. The acquisition was subject to CADE’s approval, the Brazilian anti-trust agency, which was a condition precedent for closing the acquisition. CADE approved the acquisition in May 2019, and the transaction closing date occurred on June 4, 2019.

 

Escola em Movimento is an application developer that enhances communication between schools and parents.

 

The purchase consideration transferred was R$ 18,285. The amount of R$ 16,095 was paid on the acquisition date; R$260 was paid on September 29, 2019 and R$ 1,930 has been retained for the period of 2 years as a guarantee for the payment of any contingent liabilities that may arise. Any remaining balance will be transferred to the former owners of the acquired entity. The amount will be released in two equal annual installments R$ 965, adjusted by the Brazilian basic interest rate (SELIC).

 

 F-34 

 

 

 

The Company did not recognize deferred taxes related to the business combination because the tax basis and accounting basis, including fair value adjustments, were the same at the acquisition date.

 

Goodwill

 

The goodwill recorded on the acquisition was R$ 13,069 and it is expected to be deductible for tax purposes after the Company merges the acquiree. For the purpose of impairment testing, the goodwill has been allocated to the Supplemental operating segment.

 

The goodwill acquired is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Escola em Movimento with those of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were considered by the administration as appropriate.

 

Transaction costs

 

Transaction costs of R$ 649 were expensed and are included in general and administrative expenses on December 31, 2019.

 

Measurement of fair value

 

The valuation techniques used for measuring the fair value of separate identified intangible assets acquired were as follows:

 

Asset acquired Valuation technique
Customer relationship

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

 

Software

Replacement cost

The method considers the amount that an entity would have to pay to replace at the present time, according to its current worth.

 

 

 F-35 

 

 

Trademarks

Relief-from-royalty method

The relief-from-royalty method considers the discount estimated royalty payments that are expected to be avoided as a result of the trademarks being owned.

 

Non-compete agreement

With-and-without method

The With-and-Without method consists of estimating the fair value of an asset by the difference between the value of this asset in two scenarios: a scenario considering the existence of the asset in question and another, considering its non-existence.

 

 

From the date of acquisition, EEM contributed with R$ 2,395 of net revenue and with R$ 2,918 of loss before income taxes for the year ended December 31, 2019 to the Company. If the combination had taken place at the beginning of the year ended December 31, 2019, net revenue would have been R$ 574,391 and loss before income taxes for the Company would have been R$ 43,095.

 

(b)Nave à Vela Ltda. (“Nave)

 

Nave à Vela (“Nave”) is a 2019 Arco Platform acquisition. Based on the trend that education focuses more on the development of competence-based learning than the traditional content knowledge-based, Arco decided to invest in Nave. Nave offers a competence-based learning solution, with a proprietary, high-quality content and methodology fully integrated with K12 curriculum.

 

Arco bought as a first step a 13,2% stake in the target entity in May 2019 for R$ 4,200. Included in the original purchase agreement, Arco agreed to acquire 100% of Nave over the next three years in three tranches (subject to price adjustments, net of debt at each closing date). Pursuant to the investment and share purchase agreement for the acquisition of Nave, Arco purchased an additional 37.8% on October 29, 2019.

 

The Company therefore owned 51% interest and concluded it had control and consolidated Nave as a majority owned subsidiary.

 

The purchase consideration transferred was R$ 58,194, which is composed for R$ 21,098 paid at the acquisition date, R$ 29,728 regarding a forward contract that will be paid over the next 2 years and R$ 7,368 regarding a fair value of previously held interest in a step acquisition. At the date of acquisition, the carrying amount of the investment previously held interest was R$ 3,660, resulting in a gain in step acquisition of R$ 3,708. The price of the exercise of the option is variable and conditioned to the performance of the entity, the price of the option is based on a revenue multiple.

 

 F-36 

 

 

The breakdown purchase consideration is as follows:

 

   At acquisition date 
Cash paid   21,098 
Fair value of previously held investment   7,368 
Fair value of forward contract   29,728 
Consideration transferred   58,194 

 

The Company did not recognize deferred taxes related to the business combination because the tax basis and the accounting basis, including fair value adjustments, were the same at the date of the business combination.

 

Goodwill

 

The goodwill acquired on the acquisition was R$ 37,557 and is expected to be deductible for tax purposes after the Company merges the acquiree. For the purpose of impairment testing, the goodwill has been allocated to the Supplemental operating segment.

 

The goodwill recognized is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Nave with those of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were considered by the administration as appropriate.

 

Transaction costs

 

Transaction costs of R$ 467 were expensed and are included in general and administrative expenses on December 31, 2019.

 

Measurement of fair value

 

The valuation techniques used for measuring the fair value of separate identified intangible assets acquired were as follows:

 

Asset acquired Valuation technique
Customer relationship

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

 

Trademarks

Relief-from-royalty method

The relief-from-royalty method considers the discount estimated royalty payments that are expected to be avoided as a result of the trademarks being owned.

 

 

 F-37 

 

 

Non-compete agreement

With-and-without method

The With-and-Without method consists of estimating the fair value of an asset by the difference between the value of this asset in two scenarios: a scenario considering the existence of the asset in question and another, considering its non-existence.

 

Educational system

Relief-from-royalty method

The relief-from-royalty method considers the discount estimated royalty payments that are expected to be avoided as a result of the educational system being owned.

 

 

 

From the date of acquisition, Nave contributed with R$ 7,147 of net revenue and with R$ 3,379 of profit before income taxes for the year ended December 31, 2019 to the Company. If the combination had taken place at the beginning of the year ended December 31, 2019, net revenue would have been R$ 580,276 and loss before income taxes for the Company would have been R$ 44,603.

 

(c)Sistema Positivo de Ensino (“Positivo”)

 

On May 7, 2019, the Company announced that it 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.

 

The transaction was subject to customary closing conditions, including antitrust and other regulatory approvals in Brazil. After the final antitrust approval from Brazil’s Administrative Council for Economic Defense – CADE, which occurred on October 23, 2019, Arco concluded the transaction on November 1, 2019. Accordingly, in that date, the Company, through its subsidiary EAS, acquired control of Positivo.

 

On November 1, 2019, the Company updated the amount of the contract by CDI from March 31 to October 31, 2019, to R$ 1,745,160. The 50% due on the closing date of the transaction, was reduced by restricted values (movements outside the normal course of business), corresponding to R$ 71,729. The acquisition has been approved by the Boards of Directors of both Arco and Positivo.

 

The amount of R$ 800,851 was paid on the acquisition date, and net of the restricted values, this amount corresponds to 50% of the purchase. The remaining 50% will be paid over 5 years, 20% payable in 2021 and 2022, and 30% payable in 2023 and 2024, all adjusted by the Brazilian Interbank Certificate of Deposit rate (CDI).

 

To guarantee the remaining debt, the Company signed a guarantee letter with Bradesco bank.

 

 F-38 

 

 

The Company did not recognize deferred taxes related to business combination because the tax basis and the accounting basis, including fair value adjustments, were the same at the acquisition date.

 

Goodwill

 

The goodwill recorded on the acquisition was R$ 830,028 and it is expected to be deductible for tax purposes after the Company merges the acquiree. For the purpose of impairment testing, the goodwill has been allocated to the Core operating segment regarding operations of educational content and to the Supplemental operating segment for the activities from Positvo English School, the bilingual content.

 

The goodwill recognized is primarily attributable to the expected synergies and other benefits from combining the assets and activities of Positivo with those of the Company. The goodwill paid is based on the Business Plan prepared for purposes of the acquisition, and the principal business assumptions used were considered by the administration as appropriate.

 

Transaction costs

 

Transaction costs of R$ 27,389 were expensed and are included in general and administrative expenses on December 31, 2019.

 

Measurement of fair value

 

The valuation techniques used for measuring the fair value of separate identified intangible assets acquired were as follows:

 

Asset acquired Valuation technique
Customer relationship

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

 

Trademarks

Relief-from-royalty method

The relief-from-royalty method considers the discount estimated royalty payments that are expected to be avoided as a result of the trademarks being owned.

 

Non-compete agreement

With-and-without method

The With-and-Without method consists of estimating the fair value of an asset by the difference between the value of this asset in two scenarios: a scenario considering the existence of the asset in question and another, considering its non-existence.

 

 

 

 F-39 

 

 

Educational system

Relief-from-royalty method

The relief-from-royalty method considers the discount estimated royalty payments that are expected to be avoided as a result of the educational system being owned.

 

Educational platform

 

Relief-from-royalty method

The relief-from-royalty method considers the discount estimated royalty payments that are expected to be avoided as a result of the educational platform being owned.

 

 

From the date of acquisition, Positivo contributed with R$ 80,100 of net revenue and with R$ 25,641 of profit before income taxes for the year ended December 31, 2019 to the Company. If the combination had taken place at the beginning of the year ended December 31, 2019, net revenue would have been R$ 884,504 and profit before income taxes for the Company would have been R$ 78,128.

 

(d)NS Educação Ltda. (“NS Educação”)

 

On September 28, 2017, the Company acquired control of NS Educação Ltda. (“NS Educação”) by acquiring 100% of its shares. NS Educação is a private company which sells educational content under the trademark “Universitário”. NS Educação is a content provider to middle class private schools in Brazil and represented an opportunity for the Company to achieve a greater scale and improve its margin.

 

The purchase consideration transferred amounted to R$ 38,534, comprised of cash consideration in the amount of R$ 29,037, which was paid on the date of acquisition and a deferred payment in the amount of R$ 7,302, which has been retained in an escrow account for the period of 5 years as a guarantee for the payment of any contingent liabilities that may arise. Any remaining balance will be transferred to the former owners of the acquired entity. The amount will be released in annual installments adjusted by the interest from Interbank certificates of deposit (“CDI”).

 

The equivalent of 5% of the original purchase price was determined as an "acquisition price adjustment", which was calculated based on the difference between the revenue from 2017 less the projected revenue for that year multiplied by 2.50. The purchase price adjustment totaled R$ 2,195.

 

Goodwill

 

Goodwill recorded on the acquisition is R$ 28,826 and it is expected to be deductible for tax purposes after the Company merges the acquiree. For the purpose of impairment testing, goodwill has been allocated to the Core operating segment.

 

Transaction costs

 

Transaction costs of R$ 498 were expensed and are included in general and administrative expenses for the year ended December 31, 2017.

 

 F-40 

 

 

Measurement of fair value

 

The valuation techniques used for measuring the fair value of separate identified intangible assets acquired were as follows:

 

Asset acquired Valuation technique
Customer list

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

 

Educational system

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by educational system, by excluding any cash flows related to contributory assets.

 

Trademarks

Relief-from-royalty method

The relief-from-royalty method considers the discount estimated royalty payments that are expected to be avoided as a result of the trademarks being owned.

 

Non-compete agreement

With-and-without method

The With-and-Without method consists of estimating the fair value of an asset by the difference between the value of this asset in two scenarios: a scenario considering the existence of the asset in question and another, considering its non-existence.

 

 

From the date of acquisition, NS Educação had no revenue due to the implementation process and seasonality and contributed with a loss before income taxes of R$ 1,050 for the year ended December 31, 2017. If the acquisition had taken place at the beginning of the year December 31, 2017, net revenue of the Company would have been R$ 258,848 and profit before income taxes for the Company would have been R$ 70,357.

 

(e)International School Serviços de Ensino, Treinamento e Editoração, Franqueadora S.A. (“International School”)

 

International School represented an opportunity for the Company to enter the English as a second language and bilingual teaching market. The acquisition is intended purpose to provide additional value-added content to the Company’s customers. International School has a proprietary English content solution developed for in-school programs for private schools and a professional staff that is highly qualified to develop the product and provide support to International School’s customers.

 

 F-41 

 

 

On December 21, 2015, the Company acquired 40% of the outstanding voting shares of International School for an amount of R$ 12,300. At that date, the Company entered into an agreement through which it had a call and the sellers had a put to acquire the remaining 60% of the seller’s shares. The price would be calculated using a multiple of 10x EBITDA related to the year ending December 31, 2019 and the call and put options would be exercised between January 1, 2020 and April 30, 2020. The put and call was considered symmetrical but did not give the control over the remaining shares. The Company did not have at that time (i) power over the investee; (ii) exposure, or rights, to variable returns from its involvement with the investee; (iii) the ability to use its power over the investee to affect the amount of the investor's returns.

 

In addition, the contract agreement established that the Company would only have control over the remaining 60% shares when the option was exercised. Therefore, the Company did not consolidate the investment in International School and the put and call was accounted as a forward contract marked at fair value. As of December 31, 2016, the investment was accounted for as an equity method investment and a goodwill of R$4,200 was recorded as part the investment.

 

On January 23, 2017, the Company acquired an additional 11.48% interest in International School, through the capitalization of advances for future capital increases amounting to R$ 5,300, that the Company paid in cash in 2016. This resulted in the dilution of the other shareholders and increasing its ownership from 40% to 51.48% and in obtaining control of International School. The financial statements of International School were consolidated from the date the Company acquired control and the acquisition was accounted for as a business combination.

 

On January 23, 2017, upon acquiring control of International School, the Company and the former controlling shareholder agreed to amend the exercise dates of the call and put options originally issued in 2015. In accordance with the investment agreement, as amended, the shareholders agreed that the put and call options on the 25% of the remaining interest held by the non-controlling shareholders would be exercised in the period between January 1, 2020 and April 30, 2020 and the International School audit report released up to March 31, 2020. The put and call on the remaining 23.52% would be exercised in the period between January 1, 2021 and April 30, 2021.

 

Additionally, the exercise price and purchase mechanics were also amended as follows:

 

i)The exercise price for the 25% interest was determined to be 30% x 10 x EBITDA for the 2019 school year (that comprises the twelve-month period between October and September), discounting any debts, cash ​​and the difference of the capital contribution made in the acquisition amount and also the amount that should have been contributed by the selling shareholder at the time of the acquiree’s capital increase (equivalent to R$ 3,180); and

 

ii)The exercise price for the remaining 23.52% was determined to be 30% x 10 x EBITDA for the 2020 school year discounting any debts and cash values; and

 

iii) Anticipation of the purchase mechanics in case of an initial public offering of EAS. ​

 

 F-42 

 

 

The terms of the options were assessed to determine whether or not they expose the Company to the risks and rewards associated with the actual ownership of such shares during the period of the option contract. Because the terms of the put and call options are symmetrical, the Company concluded that it is virtually certain that either the Company or the non-controlling shareholder would exercise the option because it will be in the economic interests of one of them to do so.

 

The Company accounted for the call and put options under the anticipated-acquisition method, and the non-controlling interest subject to the put or call options is deemed to have been acquired at the date of acquisition of the control. Accordingly, upon obtaining control, the Company also consolidated the interest currently legally held by the non-controlling shareholder and recognized a financial liability that would be eventually settled when the put or call option is exercised.

 

The financial liability was recorded at the present value of the estimated amount payable to the non-controlling shareholder upon the exercise of the put or call options and discounted to present value using an estimated interest rate of 21.0%. See note 28 for more information regarding the acquisition of the remaining share interest in International School.

 

Goodwill

 

A business combination achieved in stages is accounted for using the acquisition method at the acquisition date. Goodwill is calculated at the date when control is acquired. To calculate goodwill, the previously held interest was remeasured to fair value at the acquisition date, and a gain was recognized in the statement of income in other operating income (expense) for an amount of R$ 1,184 at that date. The fair value of the previously held interest then forms one of the components that is used to calculate goodwill, along with consideration and non-controlling interest, less the fair value of identifiable net assets.

 

The purchase consideration transferred totaled R$ 67,510, which breakdown is as follows:

 

   At acquisition date 
Capitalization of advances for future capital increases   5,300 
Fair value of previously held investment   32,066 
Fair value of forward contract   30,144 
Consideration transferred   67,510 

 

The table below demonstrates the calculation of goodwill:

 

   At acquisition date 
Cash consideration and fair value of the forward contract   35,444 
Fair value of previously held investment   32,066 
Fair value of identified assets acquired and liabilities assumed   (39,912)
Goodwill   27,598 

 

Goodwill arising on this acquisition is not expected to be deductible for tax purposes. For the purpose of impairment testing, goodwill has been allocated to the Supplemental operating segment.

 

 F-43 

 

 

Transactions costs

 

Transaction costs of ​R$ ​85 were expensed and are included in general and administrative expenses for the year ended December 31, 2017.

 

Measurement of fair value

 

As of the acquisition date, the fair value of trade receivables acquired equals its carrying amount.

 

The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:

 

Asset acquired Valuation technique
Customer list

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

Educational system

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by educational system, by excluding any cash flows related to contributory assets.

Trademarks

Relief-from-royalty method

The relief-from-royalty method considers the discount estimated royalty payments that are expected to be avoided as a result of the trademarks being owned.

 

From the date of acquisition, International School contributed with R$ 25,382 of net revenue and with R$ 7,465 of profit before income taxes for the year ended December 31, 2017 to the Company. If the acquisition had taken place at the beginning of the year ended December 31, 2017, net revenue would have been R$ 244,426 and profit before income taxes for the Company would have been R$ 67,024. See Note 28 for further information.

 

 F-44 

 

 

5Cash and cash equivalents

 

   2019   2018 
Cash and bank deposits   2,838    366 
Cash equivalents and bank deposits in foreign currency (a)   23,346    3,615 
Cash equivalents (b)   22,716    8,320 
    48,900    12,301 

 

(a)Short-term deposits (mainly follow-on 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 December 31, 2019, the average interest on these CDB are equivalent to 30.0% (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.

 

6Financial investments

 

   2019   2018 
Financial investments (a)   577,398    810,812 
Financial investments in foreign currency   1,629    - 
Other   467    347 
    579,494    811,159 
Current   574,804    806,789 
Non-current   4,690    4,370 

 

(a)Financial investments correspond to investments in non-exclusive funds managed by highly rated financial institutions. As of December 31, 2019, the average interest on these funds are equivalent to 99.86% (2018: 100.9%) of the CDI. The average CDI rate during the nine-month period was 0.48% per month.

 

7Trade receivables

 

   2019   2018 
From sales of educational content   354,968    146,114 
From related parties (Note 10)   4,511    3,916 
    359,479    150,030 
(-) Allowance for doubtful accounts   (30,051)   (13,419)
    329,428    136,611 

 

 F-45 

 

 

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

 

   2019   2018 
Neither past due nor impaired   299,159    127,387 
           
Past due   60,320    22,643 
           
1 to 60 days   18,931    8,931 
61 to 90 days   6,865    3,868 
91 to 120 days   6,414    1,978 
121 to 180 days   9,904    3,173 
More than 180 days   18,206    4,693 
    359,479    150,030 

 

The movement in the allowance for doubtful accounts for the years ended December 31, 2019 and 2018, was as follows:

 

   2019   2018   2017 
Balance at beginning of the year   (13,419)   (10,290)   (5,386)
Change in accounting policy – IFRS 9   -    -    (5,757)
Additions   (17,392)   (9,588)   (5,227)
Receivables written off during the period as uncollectible   760    6,459    6,080 
Balance at end of year   (30,051)   (13,419)   (10,290)

 

8Inventories

 

   2019   2018 
Educational content   24,535    8,335 
Educational content in progress (a)   12,837    6,205 
Consumables and supplies   835    286 
Inventories held by third parties   1,899    305 
    40,106    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).

 

 F-46 

 

 

Educational content is presented net of inventory reserve. The movement in the inventory reserve for the years ended December 31, 2019, 2018 and 2017 was as follows:

 

   2019   2018   2017 
Balance at beginning of the year   (4,403)   (2,047)   (1,073)
Inventory reserve   (8,476)   (7,252)   (4,481)
Write-off of inventories against reserve   6,362    4,896    3,507 
Balance at end of year   (6,517)   (4,403)   (2,047)

 

9Recoverable taxes

 

   2019   2018 
Withholding Income Tax (IRRF) on financial investments (a)   637    5,291 
Recoverable IRPJ and CSLL   17,456    5,520 
Recoverable PIS and COFINS   2,501    1,223 
Other recoverable taxes   1,631    226 
    22,225    12,260 
Current   15,612    11,227 
Non-current   6,613    1,033 

 

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

 

10Related parties

 

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

 

   2019   2018 
Assets          
Trade receivables          
Livraria ASC Ltda. and Educadora ASC Ltda. (a)   4,511    3,916 
    4,511    3,916 
Other assets          
General Atlantic Arco (Bermuda), L.P. (b)   4,109    - 
    4,109    - 
Loans to related parties          
WPensar S.A. (c)   1,298    1,226 
Loans - Geekie (d)   4,231    - 
Debentures – Geekie (d)   10,582    - 
    16,111    1,226 
Current   1,298    - 
Non-current   14,813    1,226 
           
Advances from customers          
Livraria ASC Ltda. and Educadora ASC Ltda. (a)   (1)   - 
    (1)   - 

 

 F-47 

 

 

   2019   2018   2017 
Net revenue               
Livraria ASC Ltda. and Educadora ASC Ltda. (a)   8,805    8,234    8,895 

Expenses

               
ASC Empreendimentos Ltda. and OSC Empreendimentos Ltda. (e)   (8)   (13)   (21)
                
Finance income               
WPensar S.A. (c)   72    -    - 
Geekie (d)   813