UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16

OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of May, 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 Arco Platform Limited – Unaudited Interim Condensed Consolidated Financial Statements for the three-month period ended March 31, 2020.

 

INCORPORATION BY REFERENCE

 

This current report on Form 6-K is incorporated by reference in our registration statement on Form F-3 filed with the U.S. Securities and Exchange Commission, or the SEC, on October 18, 2019 (File No. 333-234215), and shall be deemed to be a part thereof from the date on which this current report is furnished to the SEC, to the extent not superseded by documents or reports subsequently filed or furnished.

 

 

 

  

SIGNATURE

 

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

 

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

Date: May 27, 2020

  

 

 

 

Exhibit 99.1

 

 

Arco Platform Limited

 

Unaudited interim condensed

consolidated financial statements

 

March 31, 2020

 

 

 

 

 

Arco Platform Limited

 

Interim condensed consolidated statements of financial position

As of March 31, 2020, and December 31, 2019

(In thousands of Brazilian reais, unless otherwise stated)

    Notes    

March 31,

2020

    December 31, 2019  
              (unaudited)          
Assets                        
Current assets                        
Cash and cash equivalents     3       72,991       48,900  
Financial investments     4       759,944       574,804  
Trade receivables     5       343,973       329,428  
Inventories     6       41,120       40,106  
Recoverable taxes             23,382       15,612  
Financial instruments – call options on equity method investments     12       3,957       3,794  
Related parties     7       1,311       1,298  
Other assets             31,286       14,630  
Total current assets             1,277,964       1,028,572  
Non-current assets                        
Financial instruments – call options on equity method investments     12       27,893       32,152  
Deferred income tax     21       182,327       156,748  
Recoverable taxes             6,483       6,613  
Financial investments     4       4,765       4,690  
Related parties     7       14,980       14,813  
Other assets             14,915       14,399  
Investments and interests in other entities     8       60,543       48,574  
Property and equipment     9       22,169       21,328  
Right-of-use assets     10       20,471       21,631  
Intangible assets     11       1,800,352       1,811,903  
Total non-current assets             2,154,898       2,132,851  
Total assets             3,432,862       3,161,423  
                   
Liabilities                  
Current liabilities                        
Trade payables             47,159       34,521  
Labor and social obligations     14       66,716       68,511  
Taxes and contributions payable             4,948       7,508  
Income taxes payable             32,391       52,038  
Advances from customers             75,106       25,626  
Lease liabilities     10       6,774       6,845  
Loans and financing     15       298,069       98,561  
Accounts payable to selling shareholders     13       143,089       117,959  
Other liabilities             567       607  
Total current liabilities             674,819       412,176  
Non-current liabilities                        
Labor and social obligations     14       4,942       2,801  
Lease liabilities     10       17,714       19,012  
Loans and financing     15       1,211       -  
Financial instruments – put options on equity method investments     12       29,899       33,940  
Provision for legal proceedings     25       284       251  
Accounts payable to selling shareholders     13       1,096,313       1,098,273  
Other liabilities             142       160  
Total non-current liabilities             1,150,505       1,154,437  
Total liabilities             1,825,324       1,566,613  
                         
Equity     16                  
Share capital             11       11  
Capital reserve             1,607,622       1,607,622  
Share-based compensation reserve             93,453       84,546  
Accumulated losses             (93,548 )     (97,369 )
Total equity             1,607,538       1,594,810  
Total liabilities and equity             3,432,862       3,161,423  

 

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

 

 

F-2

 

 

Arco Platform Limited

 

Interim condensed consolidated statements of income and comprehensive income

For the three-month periods ended March 31, 2020 and 2019

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

 

    Notes     March 31, 2020     March 31, 2019  
              (unaudited)       (unaudited)  
Net revenue     18       261,579       117,055  
Cost of sales     19       (67,220 )     (21,869 )
                         
Gross profit             194,359       95,186  
                         
Selling expenses     19       (87,900 )     (36,135 )
General and administrative expenses     19       (66,783 )     (20,832 )
Other income, net             412       3,359  
                         
Operating profit             40,088       41,578  
                         
Finance income     20       9,387       16,956  
Finance costs     20       (38,339 )     (16,481 )
Finance result     20       (28,952 )     475  
                         
Share of loss of equity-accounted investees     8       (706 )     (492 )
                         
Profit before income taxes             10,430       41,561  
Income taxes - income (expense)                        
Current             (32,188 )     (18,252 )
Deferred             25,579       7,532  
      21       (6,609 )     (10,720 )
                         
Net profit for the period             3,821       30,841  
                         
Other comprehensive income for the period             -       -  
Total comprehensive income for the period             3,821       30,841  
                         
Basic earnings per share - in Brazilian reais     17                  
Class A             0.07       0.61  
Class B             0.07       0.61  
Diluted earnings per share - in Brazilian reais     17                  
Class A             0.07       0.59  
Class B             0.07       0.59  

 

 

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

 

 

 

F-3

 

 

Arco Platform Limited

 

Interim condensed consolidated statements of changes in equity

For the three-month periods ended March 31, 2020 and 2019

(In thousands of Brazilian reais, unless otherwise stated)

 

 

    Attributable to equity holders of the parent        
                                           
      Share capital       Capital reserve       Share-based compensation reserve       Accumulated losses       Total       Non-controlling interests       Total equity  
Balances at December 31, 2018     10       1,089,505       67,350       (86,687 )     1,070,178       (294 )     1,069,884  
Change in accounting policy – IFRS 16     -       -       -       (1,488 )     (1,488 )     -       (1,488 )
                                                         
Net profit for the period     -       -       -       30,841       30,841       -       30,841  
Total comprehensive income     -       -       -       30,841       30,841       -       30,841  
Shares issued – stock option plan     -       1,218       -       -       1,218       -       1,218  
Corporate restructuring     -       (9,462 )     -       -       (9,462 )     -       (9,462 )
Non-controlling interest     -       -       -       -       -       294       294  
Share-based compensation plan - International School     -       -       137       -       137       -       137  
                                                         
Balances at March 31, 2019 (unaudited)     10       1,081,261       67,487       (57,334 )     1,091,424       -       1,091,424  
                                                         
Balances at December 31, 2019     11       1,607,622       84,546       (97,369 )     1,594,810       -       1,594,810  
                                                         
Net profit for the period     -       -       -       3,821       3,821       -       3,821  
Total comprehensive income     -       -       -       3,821       3,821       -       3,821  
Share based compensation plan     -       -       8,907       -       8,907       -       8,907  
                                                         
Balances at March 31, 2020 (unaudited)     11       1,607,622       93,453       (93,548 )     1,607,538       -       1,607,538  

 

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

 

 

 

F-4

 

 

Arco Platform Limited

 

Interim condensed consolidated statements of cash flows

For the three-month periods ended March 31, 2020 and 2019

(In thousands of Brazilian reais)

 

    March 31, 2020     March 31, 2019  
      (unaudited)       (unaudited)  
Operating activities                
Profit before income taxes for the period     10,430       41,561  
Adjustments to reconcile profit before income taxes                
Depreciation and amortization     28,675       7,240  
Inventory reserves     2,106       2,228  
Allowance for doubtful accounts     6,168       1,653  
Loss on sale/disposal of property and equipment and intangible assets disposed     672       102  
Fair value change in financial instruments from acquisition interests     54       1,866  
Changes in accounts payable to selling shareholders     6,600       -  
Share of loss of equity-accounted investees     706       492  
Share-based compensation plan     8,907       137  
Accrued interest     1,242       -  
Interest accretion on acquisition liability     20,266       5,942  
Income from non-cash equivalents     (2,039 )     -  
Interest on lease liabilities     732       395  
Provision for legal proceedings     33       79  
Provision for payroll taxes (restricted stock units)     5,888       -  
Foreign exchange income     (742 )     (76 )
Gain on sale of investment     -       (3,288 )
Changes in assets and liabilities                
Trade receivables     (20,712 )     (16,201 )
Inventories     (485 )     36  
Recoverable taxes     (1,694 )     (4,972 )
Other assets     (17,036 )     1,952  
Trade payables     12,638       686  
Labor and social obligations     (5,542 )     4,774  
Taxes and contributions payable     (2,560 )     (572 )
Advances from customers     49,480       20,828  
Other liabilities     (58 )     (301 )
                 
Cash generated from operations     103,729       64,561  
                 
Income taxes paid     (57,543 )     (18,035 )
Interest paid on lease liabilities     (425 )     -  
Net cash flows from operating activities     45,761       46,526  
                 
Investing activities                
Acquisition of property and equipment     (2,377 )     (2,793 )
Payment of investments and interests in other entities     (12,675 )     -  
Acquisition of intangible assets     (17,059 )     (11,492 )
Purchase of financial investments     (183,176 )     (26,291 )
Loans to related parties     -       (14,000 )
Net cash flows used in investing activities     (215,287 )     (54,576 )

 

Financing activities

               
Capital increase     -       1,218  
Share issuance costs     -       (673 )
Payment of lease liabilities     (2,354 )     (515 )
Loans and financing     198,925       -  
Dividends paid by subsidiaries     (3,696 )     -  
Net cash flows from financing activities     192,875       30  
                 
Foreign exchange effects on cash and cash equivalents     742       76  
                 
Increase (decrease) in cash and cash equivalents     24,091       (7,944 )
                 
Cash and cash equivalents at the beginning of the period     48,900       12,301  
Cash and cash equivalents at the end of the period     72,991       4,357  
Increase (decrease) in cash and cash equivalents     24,091       (7,944 )

 

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

 

F-5

 

 

Notes to the unaudited interim condensed 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 unaudited interim condensed consolidated financial statements were authorized for issue by the Board of Directors on May 22, 2020.

 

F-6

 

 

2Significant accounting policies

 

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

 

These unaudited interim condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting ("IAS 34") as issued by the International Accounting Standards Board (“IASB”). Accordingly, certain disclosures included in the Company’s annual consolidated financial statements prepared in accordance with International Financial Reporting Standards (“IFRSs”) as issued by the IASB have been condensed or omitted. These unaudited interim condensed consolidated financial statements should be read in conjunction with the Company’s annual consolidated financial statements for the year ended December 31, 2019, which include information necessary or useful to understanding the Company’s business and financial statement presentation. In particular, the Company’s significant accounting policies were presented in Note 2 Significant accounting policies to the consolidated financial statements for the year ended December 31, 2019.

 

The accounting policies applied in the preparation of these unaudited interim condensed consolidated financial statements are consistent with those applied and disclosed in the Company’s consolidated financial statements for the year ended December 31, 2019.

 

In preparing these unaudited interim condensed consolidated financial statements, management has made judgements, estimates and assumptions that affect the application of accounting policies and the reported amounts of assets and liabilities, revenue and expenses. Actual results may differ from these estimates. The critical judgements made by management in applying the Company’s accounting policies and the key sources of estimation uncertainty were the same as those applied and disclosed in Note 3 Significant accounting estimates and assumptions to the Company’s consolidated financial statements for the year ended December 31, 2019.

 

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

 

2.2Significant events during the period

 

(a)Changes in the corporate organization

 

During the three-month period ended March 31, 2020, the Company had the following changes in the corporate organization:

 

On January 1, 2020, the Company perfomed a corporate reorganization through the incorporation of companies Osterreich Investimentos – Participações Societárias S.A., Mendel Investimentos – Participações Societárias S.A., Torino Investimentos – Participações Societárias S.A., Remare Investimentos – Participações Societárias S.A., Fahe Investimentos – Participações Societárias S.A. by Positivo Soluções Didáticas Ltda.

 

On March 4, 2020, Arco acquired an additional 10.51% interest in the share capital of Geekie through the purchase of minority shareholders increasing its total interest to 48.04% as shown in Note 8.

 

F-7

 

 

(b)Information related to Covid-19 pandemic

 

On March 11, 2020, the World Health Organization declared the novel coronavirus (COVID-19) a global pandemic. While the spread started December 2019 in China and adversely impacted regional economies across the globe, first cases in Brazil were officially reported during the first quarter of 2020. Such events are causing the disruption of regional and global economic activity, with many countries imposing restrictions on industries, commerce and social contact. Likewise, given recent developments in Brazil, state and local authorities have ordered many companies to limit or suspend operations and encourage social distancing with the aim to reduce the speed at which COVID-19 is spreading.

 

The measures taken by Brazilian state and local authorities directly impacted the education industry, in particular by indefinitely postponing on-site school activities. Nonetheless, as education is an important and essential service, the Company expects that it will resume normal operations once the isolation measures of state and local authorities are gradually relaxed. In Europe, in countries where the COVID-19 pandemic and, consequently, social isolation, started earlier, schools have been part of the first group of institutions to resume activities.

 

Notwithstanding the above, the Company did not suspend its activities and, in accordance with health and social distancing guidelines, its workforce continues to work remotely from home, for which additional investments in IT and network infrastructure were made. In order to safeguard the health and safety of its employees, customers and suppliers, the Company has taken several preventive measures. Our content production continues according to the scheduled curriculum calendar and the current educational material has been delivered to the schools according to the planned schedule, enabling the Company to recognize the revenues on these products at the point in time that all risks and benefits were transferred to the clients. Travel restrictions are in place, but have not limited the Company’s ability to maintain its operations. In addition, these alternative working arrangements have not adversely affected financial reporting systems, internal control over financial reporting or disclosure controls and procedures.

 

With respect to the Company’s distribution and delivery capacity, which relies on third parties, the Company’s principal vendors responsible for the printing of educational material did not raise any issues related to their ability to fulfill scheduled shipments or with respect to the incurrence of any significant additional expenses.

 

As a result, as of March 31, 2020, except for the revision of the Company’s estimated credit losses from its trade receivables, there were no other material impacts on the Company’s financial performance or position, particularly in relation to the following events and transactions during the three-month period ended March 31, 2020:

 

·Expected credit losses were revised considering estimated increases in financial defaults and in unemployment rates in Brazil for the next months, which resulted in an increase of R$3,115 in allowance for doubtful accounts as of March 31, 2020.

 

F-8

 

 

·The Company assessed the existence of potential impairment indicators and the possible impacts on the key assumptions and projections caused by the pandemic on the recoverability of long-lived assets (impairment tests) and concluded that no provision for impairment of long-lived assets needed to be recorded in the interim financial statements.

 

·Management reviewed and updated the fair value calculations of financial instruments and accounts payable to selling shareholders (Notes 12 and 13).

 

·There was no relevant impact on revenue for the three-month period ended March 31, 2020, which was consistent with the expected revenue seasonality for the period. However, although 2020 collection sales are already guaranteed through contracts signed with clients, a portion of expected deliveries for April have been delayed as a result of suspended activities in schools across Brazil, but which are expected to be fulfilled during 2020 when classes are expected to resume.

 

·The inventory reserves were increased to properly reflect the expected realization of inventories, which resulted in an incremental charge of R$287 in the unaudited interim consolidated statement of income for the three-month period ended March 31, 2020.

 

·As of March 31, 2020, management opted to not benefit from the new tax and payroll relief measures announced by the Brazilian government, which remain available if necessary.

 

·There were no changes to contractual obligations regarding leased buildings and equipment and there were no changes in the expected useful life and residual amount of properties and equipment.

 

·No changes in the provision for contingencies against the Company were identified as a result of COVID-19.

 

·The Company entered into an additional loan agreement of R$ 200,000, with no significant change in costs, and has no financial covenants on any of its existing loans and financing and has sufficient working capital and other undrawn financing facilities to service its operating activities and ongoing investments. See note 15 for further information.

 

The future impact of the COVID-19 pandemic on an ongoing basis is still uncertain and will remain a factor in the analysis of key estimates and judgements used in preparing the Company’s financial statements, especially given the rapid and unexpected changes the pandemic is posing to global and local economic environments.

 

Given the uncertainty around the extent and timing of the future spread of COVID-19, the imposition of additional protective measures, or the relaxation of existing protective measures, it is not possible to accurately predict COVID-19's general impact on the education industry or to reasonably estimate its impact on Arco's results of operations, cash flows or financial condition, including, but not limited to:

 

·A decrease in the number of students, which may impact the expected amount of revenue.

 

·An increase in inventory obsolescence.

 

·An increase in bad debt due to the current economic scenario.

 

·A change in the fair value of financial instruments.

 

·The Renegotiation of loans and lease agreements to ensure the continued strength of the Company’s financial position.

 

Management will continue to monitor and assess the impact COVID-19 may have on the Company’s business and financial performance and position.

 

F-9

 

 

3Cash and cash equivalents

 

  

March
31, 2020

  

December
31, 2019

 
   (unaudited)     
Cash and bank deposits   1,692    2,838 
Bank deposits in foreign currency (a)   2,171    23,346 
Cash equivalents (b)   69,128    22,716 
    72,991    48,900 

 

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

 

(b)Cash equivalents correspond to financial investments in Bank Certificates of Deposit (“CDB”) of highly rated financial institutions. As of March 31, 2020, the average interest on these CDB are equivalent to 82.2% (December 31, 2019: 30.0%) of the Interbank Certificates of Deposit (“CDI”). These financial investments are available for immediate use and have insignificant risk of changes in value.

  

4Financial investments

 

  

March
31, 2020

   December
31, 2019
 
   (unaudited)     
Financial investments (a)   762,041    577,398 
Financial investments in foreign currency   2,162    1,629 
Other   506    467 
    764,709    579,494 
Current   759,944    574,804 
Non-current   4,765    4,690 
           

 

(a)Financial investments correspond to investments in funds managed by highly rated financial institutions. As of March 31, 2020, the average interest on these funds are equivalent to 75.8% (December 31, 2019: 99.9%) of the CDI. The increase in the balance is mainly due to loans acquired during the period, as described in note 15.

 

5Trade receivables

 

  

March
31, 2020

  

December
31, 2019

 
   (unaudited)     
From sales of educational content   377,186    354,968 
From related parties (Note 7)   2,095    4,511 
    379,281    359,479 
(-) Allowance for doubtful accounts   (35,308)   (30,051)
    343,973    329,428 

 

F-10

 

 

 

As of March 31, 2020, and December 31, 2019, the aging of trade receivables was as follows:

 

  

March

31, 2020

  

December

31, 2019

 
   (unaudited)     
Neither past due nor impaired   326,728    299,159 
           
Past due   52,553    60,320 
           
1 to 60 days   19,274    18,931 
61 to 90 days   4,576    6,865 
91 to 120 days   2,209    6,414 
121 to 180 days   3,801    9,904 
More than 180 days   22,693    18,206 
    379,281    359,479 

 

The movement in the allowance for doubtful accounts for the three-month periods ended March 31, 2020 and 2019, was as follows:

 

  

March

31, 2020

  

March

31, 2019

 
   (unaudited)   (unaudited) 
Balance at beginning of the period   (30,051)   (13,419)
Additions   (6,168)   (1,653)
Receivables written off during the period as uncollectible   911    330 
Balance at end of period   (35,308)   (14,742)

  

6Inventories

 

  

March

31, 2020

  

December

31, 2019

 
   (unaudited)     
Educational content   21,642    24,535 
Educational content in progress (a)   17,127    12,837 
Consumables and supplies   1,069    835 
Inventories held by third parties   1,282    1,899 
    41,120    40,106 

 

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

 

Educational content is presented net of inventory reserve. The movement in the inventory reserve for the three-month periods ended March 31, 2020 and 2019 was as follows:

 

  

March

31, 2020

  

March

31, 2019

 
   (unaudited)   (unaudited) 
Balance at beginning of the period   (6,517)   (4,403)
Inventory reserve   (2,106)   (2,228)
Write-off of inventories against reserve   949    1,312 
Balance at end of the period   (7,674)   (5,319)

 

F-11

 

 

7Related parties

 

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

 

  

March

31, 2020

  

December

31, 2019

 
Assets  (unaudited)     
Trade receivables          
Livraria ASC Ltda. and Educadora ASC Ltda. (a)   2,095    4,511 
    2,095    4,511 
Other assets          
General Atlantic Arco (Bermuda), L.P. (b)   8,459    4,109 
    8,459    4,109 
Loans to related parties          
WPensar S.A. (c)   1,311    1,298 
Loans - Geekie (d)   4,279    4,231 
Debentures – Geekie (d)   10,701    10,582 
    16,291    16,111 
Current   1,311    1,298 
Non-current   14,980    14,813 
           
Advances from customers          
Livraria ASC Ltda. and Educadora ASC Ltda. (a)   (1)   (1)
    (1)   (1)

 

  

March

31, 2020

  

March

31, 2019

 
   (unaudited)   (unaudited) 
Net revenue          
Livraria ASC Ltda. and Educadora ASC Ltda. (a)   624    1,253 
           
Expenses          
ASC Empreendimentos Ltda. and OSC Empreendimentos Ltda. (e)   (1)   (2)
           
Finance income          
WPensar S.A. (c)   13    - 
Geekie (d)   167    - 
    180    - 

 

(a)Arco Ventures S.A. and International School sell educational content to Livraria ASC Ltda. and Educadora ASC Ltda., entities under common control of the Company’s controlling shareholders. The transactions are priced based on contract price at the sales date. Sales price for these transactions are conducted at arm’s length, at similar observable market prices.

 

(b)Amounts receivable from GA shareholder that will be settled within the fiscal year.

 

(c)The amounts receivable from WPensar S.A. are related to loan agreements and are indexed to the Brazilian Sistema Especial de Liquidação e Custódia (SELIC) interest rate and have a due date in July 2020. During the three-month period ended March 31, 2020, the Company recognized R$ 13 of interest income.

 

(d)On January 17, 2019, the Company entered into an agreement with its associated company, Geekie Desenvolvimento de Softwares S.A. (“Geekie”) buying 100,000 debentures issued at same date at par value of R$ 100.00 (hundred reais) each, totaling R$ 10,000. During the three-month period ended March 31, 2020, the Company recognized R$ 119 of interest income. The debentures are due in June 2022 and bear interest of 110% of the CDI. The debentures are convertible in shares at the option of Arco at maturity similar to same terms of the call and put options presented in the investment agreement.

 

F-12

 

 

On the same date, the Company lent R$ 4,000 to Geekie Partners S.A., the controlling shareholder of Geekie, through a loan agreement with payment due in June 2022, interest of 110% of the CDI, and with their entire interest in Geekie’s shares as collateral to the transaction. During the three-month period ended March 31, 2020, the Company recognized R$ 48 of interest income.

 

The transactions totaled R$ 14,000 and are intended to support Geekie’s working capital needs.

 

(e)Arco Ventures S.A. leases a facility from OSC Empreendimentos Ltda., which are entities under common control of the Company’s controlling shareholder. The agreement was terminated in February 2020.

 

Key management personnel compensation

 

Key management personnel compensation comprised the following:

 

  

March

31, 2020

  

March

31, 2019

 
   (unaudited)   (unaudited) 
Short-term employee benefits   12,443    3,112 
Share-based compensation plan   15,958    - 
    28,401    3,112 

 

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

 

Certain executive officers also participate in the Company’s share-based compensation plan (Note 14).

  

8Investments and interests in other entities

 

(a)Investments

 

(i)Investments and interests in other entities

 

Reconciliation of carrying amount:

 

   March 31, 2020   March 31, 2019 
   (unaudited)   (unaudited) 
   WPensar   Geekie   Total   Total 
At beginning of the period   3,049    45,525    48,574    11,862 
Acquisition from a minority shareholder (Note 2.2)   -    12,675    12,675    - 
Share of loss of equity-accounted investees   (51)   (655)   (706)   (492)
At end of the period   2,998    57,545    60,543    11,370 

 

 

F-13

 

 

(ii)Selected financial information for associates and joint ventures

 

   WPensar   Geekie 
March 31, 2020 (unaudited)          
Current assets   1,618    8,911 
Non-current assets   1,742    19,279 
Current liabilities   309    7,012 
Non-current liabilities   1,253    11,153 
Equity   1,798    10,025 
Net revenue   1,155    6,554 
Costs and expenses (*)   (1,125)   (7,314)
Profit (loss) for the period   30    (760)
March 31, 2019 (unaudited)          
Net revenue   1,254    3,726 
Costs and expenses (*)   (1,144)   (5,978)
Profit (loss) for the period   110    (2,253)
December 31, 2019          
Current assets   1,619    8,444 
Non-current assets   1,687    17,983 
Current liabilities   268    5,042 
Non-current liabilities   1,240    10,964 
Equity   1,798    10,421 
Net revenue   4,200    14,266 
Costs and expenses (*)   (3,985)   (25,848)
Profit (loss) for the year   215    (11,582)

 

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

 

F-14

 

 

 

9 Property and equipment

 

Reconciliation of carrying amount:

 

 

                                                              March 31, 2020       March 31, 2019  
                                                              (unaudited)       (unaudited)  
      Machinery
 and
equipment
      Vehicles        Furniture
and
fixtures
      IT equipment       Facilities       Leasehold
improvements 
      Others       Total       Total   
Cost                                                                        
At the beginning of the period     1,257       121       2,353       7,272       80       10,034       7,234       28,351       19,625  
Additions     20       -       168       949       22       909       309       2,377       2,793  
Disposals     -       -       -       -       -       -       -       -       (1,083 )
Sale of Escola de Aplicação São José dos Campos Ltda.     -       -       -       -       -       -       -       -       (1,012 )
Write-offs     -       -       -       -       -       -       -       -       (792 )
At the end of the period     1,277       121       2,521       8,221       102       10,943       7,543       30,728       19,531  
                                                                         
Depreciation                                                                        
At the beginning of the period     (221 )     (100 )     (379 )     (1,395 )     (26 )     (2,225 )     (2,677 )     (7,023 )     (6,278 )
Depreciation charge for the period     (105 )     (7 )     (23 )     (439 )     (1 )     (392 )     (569 )     (1,536 )     (707 )
Depreciation of disposals     -       -       -       -       -       -       -       -       981  
Sale of Escola de Aplicação São José dos Campos Ltda.     -       -       -       -       -       -       -       -       211  
At the end of the period     (326 )     (107 )     (402 )     (1,834 )     (27 )     (2,617 )     (3,246 )     (8,559 )     (5,793 )
                                                                         
Net book value                                                                        
At the beginning of the period     1,036       21       1,974       5,877       54       7,809       4,557       21,328       13,347  
At the end of the period     951       14       2,119       6,387       75       8,326       4,297       22,169       13,738  
                                                                         
Annual depreciation rates     10 %     20 %     10 %     20 %     10 %     10% to 50%       33 %                

 

The Company assesses, at each reporting date, whether there is an indication that a property and equipment asset may be impaired. If any indication exists, the Company estimates the asset’s recoverable amount. There were no indications of impairment of property and equipment as of and for the three-month periods ended March 31, 2020 and 2019.

 

 

F-15

 

 

10 Leases

 

The balance sheet shows the following amounts relating to leases:

 

   

March

31, 2020

   

December

31, 2019

 
    (unaudited)        
Right-of-use assets                
Properties     20,358       21,518  
Machinery and equipment     113       113  
      20,471       21,631  

 

   

March

31, 2020

   

December

31, 2019

 
    (unaudited)        
Lease liabilities *                
Current     6,774       6,845  
Non-current     17,714       19,012  
      24,488       25,857  

 

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

 

   

March

31, 2020

   

March

31, 2019

 
    (unaudited)     (unaudited)  
Right-of-use assets                
At the beginning of the period     21,631       20,102  
Additions     237       -  
Lease modification     441       (559 )
Depreciation expense     (1,838 )     (1,140 )
At the end of the period     20,471       18,403  
                 
Average annual depreciation rate     24.3 %        

 

   

March

31, 2020

   

March

31, 2019

 
    (unaudited)     (unaudited)  
Lease liabilities                
At the beginning of the period     25,857       22,321  
Additions     237       -  
Lease modification     441       (559 )
Interest expense     732       395  
Payments of lease liabilities     (2,354 )     (515 )
Interest paid     (425 )     -  
At the end of the period     24,488       21,642  
                 

 

The Company recognized rent expense from short-term leases and low-value assets of R$ 703 for the three-month period ended March 31, 2020 (March 31, 2019: R$ 578).

 

 

F-16

 

 

11 Intangible assets and goodwill

 

                                                               

March

31, 2020

   

March

31, 2019

 
                                                                (unaudited)     (unaudited)  
    Goodwill     Rights on contracts     Customer relationships     Educational system    

 

 

Copyrights

    Software license     Trademarks     Educational platform     Non-compete agreement     In Progress     Total     Total  
Cost                                                                                                
At the beginning of the period     916,767       15,263       206,971       251,223       21,069       18,412       355,298       87,987       8,303       9,606       1,890,899       224,496  
Corporate restructuring     -       -       -       -       -       -       -       -       -       -       -       (14,597 )
Acquisitions     -       -       -       -       1,220       3,703       -       9,694       -       2,442       17,059       11,492  
Disposals     -       -       -       -       -       -       -       (956 )     -       -       (956 )     -  
Transfer     -       -       -       -       -       -       -       1,849       -       (1,849 )     -       -  
At the end of the period     916,767       15,263       206,971       251,223       22,289       22,115       355,298       98,574       8,303       10,199       1,907,002       221,391  
                                                                                                 
Amortization                                                                                                
At the beginning of the period     -       (5,291 )     (14,010 )     (22,234 )     (11,682 )     (2,955 )     (8,241 )     (13,773 )     (810 )     -       (78,996 )     (36,756 )
Amortization     -       (381 )     (5,646 )     (6,532 )     (1,433 )     (1,372 )     (4,625 )     (7,498 )     (451 )     -       (27,938 )     (6,296 )
Amortization of disposals     -       -       -       -       -       -       -       284       -       -       284       -  
At the end of the period     -       (5,672 )     (19,656 )     (28,766 )     (13,115 )     (4,327 )     (12,866 )     (20,987 )     (1,261 )     -       (106,650 )     (43,052 )
                                                                                                 
Net book value                                                                                                
At the beginning of the period     916,767       9,972       192,961       228,989       9,387       15,457       347,057       74,214       7,493       9,606       1,811,903       187,740  
At the end of the period     916,767       9,591       187,315       222,457       9,174       17,788       342,432       77,587       7,042       10,199       1,800,352       178,339  
                                                                                                 
Annual amortization years     -       10       5 to 16       3 to 10       3       2 to 5       10 to 20       3 to 10       2 to 5       -                  

 

 

 

F-17

 

 

    (a) Goodwill

 

The carrying amount of goodwill by operating segment was:

 

   

March

31, 2020

   

December

31, 2019

 
    (unaudited)        
Core     755,539       755,539  
Supplemental     161,228       161,228  
      916,767       916,767  

 

Impairment test for goodwill

 

The Company performs its annual impairment test in December and whenever circumstances indicate that the carrying value may be impaired. The Company’s impairment test for goodwill is based on value-in-use calculations. The key assumptions used to determine the recoverable amount for the different cash generating units were disclosed in the annual consolidated financial statements for the year ended December 31, 2019.

 

There were no indications of impairment for the three-month periods ended March 31, 2020 and 2019.

 

  (b) Other intangible assets

 

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

 

For the three-month periods ended March 31, 2020 and 2019 there were no indicators that the Company’s intangible assets with definite lives might be impaired.

 

12 Financial instruments – call and put options on equity method investments

 

The breakdown of derivative instruments from business combinations and acquisition of investments in associates and joint ventures is as follows:

 

   

March

31, 2020

    December 31, 2019  
    (unaudited)        
Assets                
Derivative financial instruments (*)                
Investment in Geekie     27,893       32,152  
Investment in WPensar     3,957       3,794  
      31,850       35,946  
Current     3,957       3,794  
Non-current     27,893       32,152  

 

 

F-18

 

 

 

  

March

31, 2020

  

December 31,

2019

 
   (unaudited)     
Liabilities          
Derivative financial instruments (*)          
Investment in Geekie   (27,673)   (31,626)
Investment in WPensar   (2,226)   (2,314)
    (29,899)   (33,940)

 

(*)Refer to Note 11 of the consolidated financial statements at December 31, 2019 for a description of the terms and condition of the call and put options.

 

13Accounts payable to selling shareholders

 

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

 

  

March

31, 2020

  

December 31,

2019

 
   (unaudited)     
Accounts payable to selling shareholders          
Acquisition of International School (a)   (311,075)   (297,722)
Acquisition of NS Educação Ltda. (b)   (6,528)   (6,461)
Acquisition of Escola em Movimento (c)   (2,012)   (1,992)
Acquisition of Nave à Vela (d)   (31,777)   (30,946)
Acquisition of Positivo (e)   (888,010)   (879,111)
    (1,239,402)   (1,216,232)
Current   (143,089)   (117,959)
Non-current   (1,096,313)   (1,098,273)

 

(a)The financial liability is recorded at the present value of the estimated amount payable to the non-controlling shareholder upon the exercise of the put or call options and discounted to present value using an estimated interest rate of 15.5%. During the three-month period ended March 31, 2020, the Company recognized R$10,215 of interest. The amount payable is estimated based on realized EBITDA for the 2019 school year and projected EBITDA for 2020 school year. The first installment will be paid in the first half of 2020 and the second installment in the first half of 2021. The Company performed a review of previous operations projections, because it had a better visibility regarding next year’s contracts revenue with customers (ACV), and respective costs and expenses. Based on the new projected numbers for 2020, the accounts payable increased by R$6,834. See Note 25 for more information.

 

(b)This amount was retained for any losses, which will be released in annual installments until December 31, 2022. The amount is being adjusted by the interest from Interbank certificates of deposit (CDI).

 

(c)This amount was retained for any losses, which will be released in two annual installments on the first and second anniversary of the acquisition. The amount is being adjusted by the basic interest rate (SELIC).

 

(d)This amount is related to the remaining acquisition of 49% interest in Nave and will occur over the next two years (subject to price adjustments, net of debt at each closing date). This amount is recorded at the present value using an estimated interest rate of 15.5%. During the three-month period ended March 31, 2020, the Company recognized R$1,065 of interest. The next tranche is payable on February 15, 2021, in this date Arco Ventures S.A. will acquire 24% interest, for the 24% of Nave’s revenues from October 1, 2019 to September 30, 2020 multiplied by 5.3, net of debt. The last tranche is payable on February 15, 2022, in this date Arco Ventures S.A. will acquire 25% interest, for 25% of Nave’s revenues from October 1, 2020 to September 30, 2021 multiplied by 3, net of debt. Based on the new projected numbers for 2020 and 2021 school year, the accounts payable decreased by R$234.

 

F-19

 

 

(e)The amount of the contract is updated by CDI and the Company the Company recognized R$8,899 of interest During the three-month period ended March 31, 2020.

  

14Labor and social obligations

 

(a)Variable remuneration (bonuses)

 

The Company recorded bonuses related to variable remuneration of employees and management in cost of sales, selling and administrative expenses in the amount of R$4,502 during the three-month period ended March 31, 2020.

 

(b)Share-based compensation plan

 

Arco plan

 

Members of the Company’s management participated in the EAS share-based compensation plan. In 2019, all directors exercised their stock options.

 

As of March 31, 2020 and December 31, 2019, there were no outstanding share options. There was no stock options expense for the three-month period ended March 31, 2020.

 

International School plan

 

There were no share options granted, forfeited, exercised and expired for the three-month period ended March 31, 2020.

 

The share options vest on January 1, 2020 and the compensation expense recognized for the International School Plan in the statement of income (loss) for the three-month period ended March 31, 2020 was R$ 2.

 

Restricted stock units

 

In 2019 the Company issued a new share-based payment program called restricted stock units (“RSU”) of the holding company Arco Platfom Limited for employees registered with the Company's subsidiaries, which will be available for sale by the beneficiaries annually, on their anniversary dates. The related compensation expense will be recognized over according to the following schedule.

 

Final vesting date  Quantity of stocks 
28/09/2019   197,951 
30/06/2020   3,086 
28/09/2020   214,509 
28/09/2021   214,509 
28/09/2022   16,557 
Total   646,612 

 

F-20

 

 

The participant's right to effectively receive ownership of the restricted shares will be conditioned to the participant's continuance as an employee, director or director of any company in the business group from the grant date until the grace periods (“Vesting”). If a participant leaves the group, it will be considered as non-compliance with the “vesting” condition, not being a cancellation of the plan but a “forfeiture”. After the vesting period, the restricted shares have the same rights and privileges as any shareholder.

 

The following table reflects the movements from the grant date until March 31, 2020:

 

   Number of share options 
Outstanding at December 31, 2019   337,185 
Granted   62,837 
Estimated forfeited   (2,981)
Outstanding at March 31, 2020   397,041 

 

The total compensation expense for the three-month period ended March 31, 2020, including taxes and social charges, was R$15,958, (R$8,907 of principal and R$7,051 of taxes and contributions) net of estimated forfeited. These awards are classified as equity settled.

 

The fair value of these equity instruments was measured on the grant date as follows:

 

Grant date  Total shares granted   Total shares outstanding   Average fair value at grant date   Average fair value of the unit 
30/04/2019   542,760    310,515    68,800    126.76 
30/06/2019   1,543    1,450    319    206.66 
30/06/2019   1,543    1,450    274    177.71 
15/10/2019   37,929    23,769    7,593    200.18 
23/01/2020   13,000    12,220    2,788    214.48 
02/03/2020   36,673    34,473    8,762    238.93 
04/03/2020   13,164    13,164    3,346    254.21 
Total   646,612    397,041    91,882      

 

The grant date is the date on which the entity and the counterparty (including employee) entered into a share-based payment agreement, that is, when the entity and the counterparty have a shared understanding of the terms and conditions of the agreement.

 

F-21

 

 

 

15Loans and financing

 

   Interest rate  Maturity  

March

31, 2020

  

December

31, 2019

 
          (unaudited)     
Bank loan  100% CDI + 0.7% pa   October/2020    100,497    98,561 
Bank loan  100% CDI + 0.7% pa   December/2020    196,764    - 
Bank loan  8.1% pa   March/2022    2,019    - 
            299,280    98,561 
Current           298,069    98,561 
Non-current           1,211    - 

 

On February 17, 2020, Nave à Vela, a Company’s subsidiary, entered into a loan agreement in the amount of R$2,000 for working capital, to be settled in 21 installments from July 2020 to March 2022.

 

On March 23, 2020, the Company increased its borrowings under a loan contract by R$200,000. This loan is repayable in a single installment due in December 2020 and is classified as short-term in the consolidated financial statements. The loan is secured by guarantee letter through a chattel mortgage of Positivo's shares. Financing arranged by Company is not subject to compliance with any financial covenants.

 

Set out below the movements during the period:

 

  

March

31, 2020

 
   (unaudited) 
Balance at beginning of the period   98,561 
Additions   202,000 
Loan cost   (3,075)
Interest expense   1,794 
Balance at end of period   299,280 

 

16Equity

 

Share capital

 

As of March 31, 2020, and December 31, 2019, Arco’s share capital is represented by 54,939,088 common shares of par value of US$ 0.00005 each, comprised by 27,400,848 Class B common shares and 27,538,240 Class A common shares.

 

The Class B common shares are entitled to 10 votes per share and the Class A common shares, which are publicly traded, are entitled to one vote per share. The Class B common shares are convertible into an equivalent number of Class A common shares and generally convert into Class A common shares upon transfer subject to limited exceptions.

 

The dual class structure will exist as long as the total number of issued and outstanding Class B common shares is at least 10% of the total number of shares outstanding.

 

F-22

 

 

17Earnings per share (EPS)

 

Basic

 

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

 

Diluted

 

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

 

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

 

   March 31, 2020 (unaudited)   March 31, 2019 (unaudited) 
   Class A   Class B   Total   Class A   Class B   Total 
Profit attributable to equity holders of the parent   1,915    1,906    3,821    13,903    16,938    30,841 
Weighted average number of common shares outstanding (thousand)   27,538    27,401    54.939    22,640    27,658    50,298 
Effects of dilution from:                              
Share-based compensation plan (thousands)   397    -         859    -      
                               
Basic earnings per share - R$   0.07    0.07         0.61    0.61      
Diluted earnings per share - R$   0.07    0.07         0.59    0.59      

 

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

 

18Revenue

 

The Company’s net revenue is as follows:

 

  

March

31, 2020

  

March

31, 2019

 
   (unaudited)   (unaudited) 
Educational content   278,717    128,905 
Other   2,184    - 
Deductions:          
Taxes   (297)   - 
Returns and discounts   (19,025)   (11,850)
Net revenue   261,579    117,055 

 

F-23

 

 

 

    March 31,
2020
    March 31,
2019
 
                (unaudited)                 (unaudited)  
Segments   Core     Supplemental     Total     Core     Supplemental     Total  
Type of goods or service                                    
Educational content     220,145       39,250       259,395       99,150       17,905       117,055  
Other     538       1,646       2,184       -       -       -  
Total net revenue from contracts with customers     220,683       40,896       261,579       99,150       17,905       117,055  
Timing of revenue recognition                                                
Transferred at a point in time     220,683       40,896       261,579       99,150       17,905       117,055  
Total net revenue from contracts with customers     220,683       40,896       261,579       99,150       17,905       117,055  

 

The Company recognized impairment losses on trade receivables arising from contracts with customers, included under selling expenses in the statement of income, of R$ 6,168 and R$ 1,653 for the three-month periods ended March 31, 2020 and 2019, respectively.

 

19 Expenses by nature
    March 31,
2020
    March 31,
2019
 
    (unaudited)     (unaudited)  
Content providing     43,442       11,208  
Operations personnel     5,398       2,323  
Inventory reserves     2,106       2,228  
Freight     6,491       3,094  
Depreciation and amortization     7,392       2,543  
Other     2,391       473  
Cost of sales     67,220       21,869  
                 
Sales personnel     38,007       19,472  
Depreciation and amortization     18,093       3,095  
Sales & marketing     8,327       3,070  
Customer support     15,109       7,010  
Allowance for doubtful accounts     6,168       1,653  
Real estate rentals     211       563  
Other     1,985       1,272  
Selling expenses     87,900       36,135  
                 
Corporate personnel     22,011       12,437  
Third party services     20,264       4,058  
Real estate rents     400       578  
Travel expenses     1,727       569  
Tax expenses     1,727       723  
Software licenses     1,035       189  
Share-based compensation plan     15,960       137  
Depreciation and amortization     3,190       1,602  
Other     469       539  
General and administrative expenses     66,783       20,832  
                 
Total     221,903       78,836  

 

F-24

 

 

The increase in expenses for the three months ended March 31, 2020 compared to the same period of the previous year, is due to the inclusion of companies acquired in 2019 as mentioned in note 4 of the consolidated financial statements as of December 31, 2019.

 

20 Finance result
    March 31,
2020
    March 31,
2019
 
      (unaudited)       (unaudited)  
Income from financial investments     928       12,063  
Changes in fair value of financial investments (a)     1,426       278  
Changes in fair value of derivative instruments (b)     4,205       3,449  
Foreign exchange gains     1,023       312  
Interest income     1,199       -  
Other     606       854  
Finance income     9,387       16,956  
                 
Changes in fair value of derivative instruments (b)     (4,259 )     (5,369 )
Changes in accounts payable to selling shareholders (Note 13)     (6,600 )     -  
Financial discounts granted     (1,300 )     (1,066 )
Bank fees     (1,145 )     (1,080 )
Foreign exchange loss     (281 )     -  
Interest on acquisition of investments (c)     (20,266 )     (7,524 )
Interest lease liabilities     (732 )     (395 )
Other     (3,756 )     (1,047 )
Finance costs     (38,339 )     (16,481 )
                 
Finance result     (28,952 )     475  

 

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

 

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

 

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

 

 

F-25

 

 

 

21 Income taxes

 

(a) Reconciliation of income taxes expense

 

    March 31,
2020
    March 31,
2019
 
    (unaudited)     (unaudited)  
Profit before income taxes     10,430       41,561  
Combined statutory income taxes rate - %     34 %     34 %
Income tax benefit (expense) at statutory rates     (3,546 )     (14,131 )
                 
Reconciliation adjustments:                
  Share of loss of equity-accounted investees (a)     (240 )     (167 )
   Effect of presumed profit of subsidiaries (b)     561       4,738  
   Other (additions) exclusions, net     (3,384 )     (1,160 )
      (6,609 )     (10,720 )
                 
Current     (32,188 )     (18,252 )
Deferred     25,579       7,532  
Income taxes benefit (expense)     (6,609 )     (10,720 )
                 
Effective rate     63.4 %     25.8 %
                 
  (a) Refers to the effect of 34% on the share of profit of investees for the year.

 

  (b) Brazilian tax law establishes that companies that generate gross revenues of up to R$ 78,000 in the prior fiscal year may calculate income taxes as a percentage of gross revenue, using the presumed profit income tax regime. The Company’s subsidiaries adopted this tax regime and the effect of the presumed profit of subsidiaries represents the difference between the taxation based on this method and the amount that would be due based on the statutory rate applied to the taxable profit of the subsidiaries.

 

 

(b) Deferred income taxes

 

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

 

    As of December 31, 2019     Recognized in profit or loss    

As of March

31, 2020

 
                      (unaudited)  
Deferred tax assets                        
Tax losses carryforward     16,283       10,367       26,650  
Temporary differences                        
Financial instruments – call options on equity method investments     106,729       7,250       113,979  
Tax benefit from tax deductible goodwill     14,888       (1,004 )     13,884  
Other temporary differences     29,325       419       29,744  
Share base compensation     7,960       4,972       12,932  
Amortization of intangible assets     6,673       5,040       11,713  
Total deferred tax assets     181,858       27,044       208,902  
Deferred tax liabilities                        
Financial instruments – put options on equity method investments     (23,873 )     (1,429 )     (25,302 )
Other temporary differences     (1,237 )     (36 )     (1,273 )
Total deferred tax liabilities     (25,110 )     (1,465 )     (26,575 )
Deferred tax assets (liabilities), net     156,748       25,579       182,327  
Deferred tax assets     156,748               182,327  
Deferred tax liabilities     -               -  

 

 

F-26

 

 

As of March 31, 2020, the Company had unrecognized deferred income tax assets in the amount of R$ 387 (December 31, 2019: R$ 1,382) with respect to tax loss carryforward. The net operating losses carried forward do not expire, however, their compensation is limited to 30% of the annual taxable income. The recognition of the deferred income tax assets is supported by the Company’s forecasts of the future profitability and historical results.

 

22 Segment information

 

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

 

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

 

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

 

(ii)           Supplemental: The Supplemental Solutions business segment provide additional value-added content that private schools can opt in for, in addition to the Core Curriculum solution. Currently, the Company’s primary Supplemental product is an English as a second language (ESL) bilingual teaching program. Technological solutions for communication with the students’ parents, learning laboratories that use the methodology of maker culture and content to develop socio-emotional skills are also offered.

 

The Executive Officers do not make strategic decisions or evaluate performance based on geographic regions. Also, based on the agreements signed with schools as of March 31, 2020, none of our customers individually represented more than 5% of our total revenue.

 

 

F-27

 

 

    Three-month period ended March 31, 2020 (unaudited)  
    Core     Supplemental     Total reportable segments     Adjustments and eliminations     Total  
Net revenue     220,683       40,896       261,579       -       261,579  
Cost of sales     (59,245 )     (7,975 )     (67,220 )     -       (67,220 )
Gross profit     161,438       32,921       194,359       -       194,359  
Selling expenses     -       -       -       -       (87,900 )
General and administrative expenses     -       -       -       -       (66,783 )
Other income, net     -       -       -       -       412  
Operating profit     -       -       -       -       40,088  
Finance income     -       -       -       -       9,387  
Finance costs     -       -       -       -       (38,339 )
Share of loss of equity-accounted investees     -       -       -       -       (706 )
Profit before income taxes     -       -       -       -       10,430  
Income taxes expense     -       -       -       -       (6,609 )
Profit for the period     -       -       -       -       3,821  
                                         
Other disclosures                                        
Depreciation and amortization     26,550       2,125       28,675       -       28,675  
Investments in associates and joint ventures     60,543       -       60,543       -       60,543  
Capital expenditures     16,468       2,968       19,436       -       19,436  

 

 

F-28

 

 

 

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

 

Capital expenditures consist of additions of property and equipment and intangible assets. There were no inter-segment revenues in the three-month periods ended March 31, 2020 and 2019.

 

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

 

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

 

   Core   Supplemental   Total
reportable
segments
   Adjustments
and
eliminations
   Total 
March 31, 2020 (unaudited)                         
Total assets   3,294,834    162,609    3,457,443    (24,581)   3,432,862 
Total liabilities   1,793,636    56,269    1,849,905    (24,581)   1,825,324 
December 31, 2019                         
Total assets   2,999,497    176,196    3,175,693    (14,270)   3,161,423 
Total liabilities   1,535,695    45,188    1,580,883    (14,270)   1,566,613 

 

F-29

 

 

23Financial instruments

 

The Company holds the following financial instruments:

 

 

Financial assets

  Assets at
FVPL
   Assets at
amortized cost
   Total 
March 31, 2020 (unaudited)               
Cash and cash equivalents   -    72,991    72,991 
Financial investments   434,112    330,597    764,709 
Trade receivables   -    343,973    343,973 
Financial instruments – call options on equity method investments   31,850    -    31,850 
Related parties   -    16,291    16,291 
Other assets   -    8,459    8,459 
    465,962    772,311    1,238,273 

 

 

Financial assets

  Assets at
FVPL
   Assets at
amortized cost
   Total 
December 31, 2019               
Cash and cash equivalents   -    48,900    48,900 
Financial investments   498,584    80,910    579,494 
Trade receivables   -    329,428    329,428 
Financial instruments – call options on equity method investments   35,946    -    35,946 
Related parties   -    16,111    16,111 
Other assets   -    4,109    4,109 
    534,530    479,458    1,013,988 

 

 

Financial liabilities

  Liabilities at
FVPL
   Liabilities at
amortized cost
   Total 
March 31, 2020 (unaudited)               
Trade payables   -    47,159    47,159 
Financial instruments – put options on equity method investments   29,899    -    29,899 
Accounts payable to selling shareholders   342,852    896,550    1,239,402 
Lease liabilities   -    24,488    24,488 
Loans and financing   -    299,280    299,280 
    372,751    1,267,477    1,640,228 

 

 

Financial liabilities

  Liabilities at
FVPL
   Liabilities at
amortized cost
   Total 
December 31, 2019               
Trade payables   -    34,521    34,521 
Financial instruments – put options on equity method investments   33,940    -    33,940 
Accounts payable to selling shareholders   328,668    887,564    1,216,232 
Leases liabilities   -    25,857    25,857 
Loans and financing   -    98,561    98,561 
    362,608    1,046,503    1,409,111 

 

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

 

F-30

 

 

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

 

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

 

Financial investments

 

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

 

Derivative instruments

 

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

 

As of and for the three-month periods ended March 31, 2020 and 2019 none of the Company’s derivatives have been designated as hedges for accounting purposes.

 

(ii) Amounts recognized in profit or loss

 

Changes in fair values of financial instruments at fair value through profit or loss are recorded in finance income (costs) in profit or loss (loss of R$ 54 and gain of R$ 1,866 for the three-month periods ended in March 31, 2020 and 2019, respectively).

 

(b) Recognized fair value measurements

 

(i) Fair value hierarchy

 

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

 

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

 

   Hierarchy  

March
31, 2020

  

December
31, 2019

 
       (unaudited)     
Financial assets               
Financial investments   Level 2    434,112    498,584 
Derivative financial instruments   Level 3    31,850    35,946 
                
Financial liabilities               
Derivative financial instruments   Level 3    29,899    33,940 
Accounts payable to selling shareholders   Level 3    342,852    328,668 

 

F-31

 

 

As of March 31, 2020, and December 31, 2019, the Company assessed the fair values of its financial instruments and concluded that carrying amounts and fair values approximate. The estimated realizable values of financial assets and liabilities were determined based on available market information and appropriate valuation methodologies.

 

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

 

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

 

(ii) Valuation techniques used to determine fair values

 

Specific valuation techniques used to value financial instruments include:

 

·the use of quoted market prices or dealer quotes for similar instruments;
·the fair value of derivatives is calculated with Black & Scholes; and
·the fair value of the remaining financial instruments is determined using discounted cash flow analysis.

 

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

 

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

 

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

 

The following table presents the changes in level 3 items for the three-month periods ended March 31, 2020 and 2019.

 

Recurring fair value measurements  Financial instruments
– call options
on equity method
investments (assets)
   Financial instruments –
put options on
equity method
investments (liabilities)
   Accounts payable
to selling
shareholders
 
As of December 31, 2018   26,630    (25,097)   (174,410)
Deferred revenue in Escola de Aplicação São José dos Campos Ltda.   -    54    - 
Interest expense   -    -    (6,554)
Gains (loss) recognized in statement of income   (5,369)   3,449    - 
As of March 31, 2019 (unaudited)   21,261    (21,594)   (180,964)
                
As of December 31, 2019   35,946    (33,940)   (328,668)
Payment   -    -    3,696 
Changes in accounts payable to selling shareholders   -    -    (6,600)
Interest expense   -    -    (11,280)
Gains (loss) recognized in statement of income   (4,096)   4,041    - 
As of March 31, 2020 (unaudited)   31,850    (29,899)   (342,852)

 

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(iv) Transfers between levels 2 and 3

 

During the three-month periods ended March 31, 2020 and 2019, the Company did not transfer any financial instruments from level 2 into level 3.

 

(v) Valuation processes

 

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

 

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

 

  · Discount rates for financial assets and financial liabilities are determined using a capital asset pricing model to calculate a pre-tax rate that reflects current market assessments of the time value of money and the risk specific to the asset.
  · Risk adjustments specific to the counterparties (including assumptions about credit default rates) are derived from observable market data of credit risk grading.
  · Earnings growth factors for unlisted equity securities are estimated based on market information for similar types of companies.
  · Contingent consideration – expected cash outflows are estimated based on the terms of the business combinations and the entity’s knowledge of the business as well as how the current economic environment is likely to impact it.

 

  24 Risk

 

(a) Financial risk management

 

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

 

The sensitivity analyses in the following sections relate to the position as of March 31, 2020.

 

Capital management

 

The Company’s objectives when managing capital are to:

 

  · maximize shareholder value;
  · safeguard its ability to continue as a going concern, so that it can continue to provide returns for shareholders and benefits for other stakeholders; and
  · maintain an optimal capital structure to reduce the cost of capital.

 

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

 

 

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No changes were made in the objectives, policies or processes for managing capital during the three-month period ended March 31, 2020.

 

  (i) Foreign exchange risk

 

Exposure

 

The Company’s exposure to foreign currency risk as of March 31, 2020 and December 31, 2019, was as follows:

 

    March 31,
2020
    December 31, 2019  
      (unaudited)          
Cash and cash equivalents (Note 3)     2,171       23,346  
Financial investments (Note 4)     2,162       1,629  

 

The Company does not have exposure to foreign exchange risk on commercial transactions, i.e., revenues or expenses.

 

Sensitivity analysis

 

The sensitivity analysis as of March 31, 2020 consider three scenarios of U.S. dollar exchange rate variation, as follows:

 

  · Base scenario - exchange rate as of March 31, 2020 of R$ 5.1981 per US$ 1.00;
  · Scenario I - a 10% increase in the U.S. dollar exchange rate, to R$ 5.7179; and
  · Scenario II - a 10% decrease in the U.S. dollar exchange rate, to R$ 4.6783.

 

The table below set forth the sensitivity analysis as of March 31, 2020, for the amount of cash and cash equivalents denominated in U.S. dollar of US$ 834 thousand:

 

  Base scenario   Scenario I   Scenario II  
  Exchange rate:
R$ 5.1981
  Exchange rate:
R$ 5.7179
  Exchange rate:
R$ 4.6783
 
Finance income (costs)     R$ 433   R$ (433)  

 

The Company ensures that its net exposure is maintained at an acceptable level in accordance with the policies and limits defined by the Management and is monitoring the possible impacts of the COVID-19 pandemic.

 

 

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  (ii) Liquidity risk

 

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

 

 

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

 

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

 

March 31, 2020 (unaudited)   On demand     Less than 3 months     3 to 12 months     1 to 5 years     More than 5 years     Total  
Trade payables     -       47,159       -       -       -       47,159  
Lease liabilities     -       1,809       4,965       17,714       -       24,488  
Loans and financing     -       -       298,069       1,211       -       299,280  
Financial instruments – put options on equity method investments     -       -       -       29,899       -       29,899  
Accounts payable to selling shareholders     -       127,175       15,914       1,096,313       -       1,239,402  
      -       176,143       318,948       1,145,137       -       1,640,228  

 

The Company does not expect to have a significant impact on liquidity and cash flow resulting from the COVID-19 pandemic and reinforces its commitment to resource management to maintain its schedule of commitments, not generating liquidity risks for the Company and its subsidiaries.

 

  (iii) Financial counterparty risk

 

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

 

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

 

As a result of the COVID-19 pandemic, the Company is individually assessing customer demands. The Company has taken steps to ensure the continued strength of its financial position. In order to mitigate the impact to the credit risk the Company has been monitoring the amounts receivable more intensively, as well as intensifying the collection of receivables.

 

 

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  (iv) Interest rate risk

 

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

 

Sensitivity analysis

 

The Company has a significant portion of its financial investments indexed to the CDI variation. According to the reference rates obtained from the website of the Brazilian Stock Exchange – B3 S.A. - Brasil, Bolsa, Balcão (“B3”) and projected for 12 months, as of March 31, 2020 the CDI rate was 2.70%.

 

As of March 31, 2020 the Company’s management estimated two scenarios of the CDI rates at +10% and -10%, which were used as a basis for the possible and remote scenarios, respectively. The table below shows a summary of the scenarios estimated by Management and the effect on profit before income taxes:

 

March 31, 2020 (unaudited)     Exposure       +10%       -10%  
Cash, bank deposits and cash equivalents     70,820       191       (191 )
Financial investments     762,547       2,059       (2,059 )
Accounts payable to selling shareholders     888,010       2,398       (2,398 )
Related parties     14,980       40       (40 )
Loans and financing     299,280       819       (819 )

 

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

 

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

 

Changes in liabilities arising from financing activities

 

    December 31,
2019
    Cash
flows
    Other     March 31,
2020
 
                      (unaudited)  
Leases     25,857       (2,779 )     1,410       24,488  
Loans and financing     98,561       198,925       1,794       299,280  
Total     124,418       196,146       3,204       323,768  

 

 

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Other market risk

 

 

The Company has a significant portion of its accounts payable whose exercise price is determined by multiples of EBITDA discounted to present value for the acquisition of the remaining interest of International School as described in note 13.

 

Sensitivity analysis

 

As of March 31, 2020, the Company’s management estimated two scenarios of the rates at +10% and -10% of revenue and +5% and -5% of Weighted Average Capital Cost (WACC), whose premises are used in the calculation of debt. The table below shows a summary of the scenarios estimated:

 

    Revenue change     Revenue change  
    10%     -10%  
Effect on purchase obligation     23,022       (23,022 )

 

    WACC change     WACC change  
    5%     -5%  
Effect on purchase obligation     8,680       (8,680 )

 

 

  25 Commitments and contingencies

 

  (i) Legal proceedings

 

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

 

    Civil     Labor     Taxes     Total  
Balance at December 31, 2018     -       17       114       131  
Additions     -       209       145       354  
Reversals     -       (104 )     (130 )     (234 )
Balance at December 31, 2019     -       122       129       251  
Additions     35       -       -       35  
Reversals     -       -       (2 )     (2 )
Balances at March 31, 2020 (unaudited)     35       122       127       284  

 

 

As of March 31, 2020, the Company was party to lawsuits classified as possible losses totaling R$ 6,634 (R$ 7,209 as of December 31, 2019), as shown below:

 

    March 31,
2020
    December 31,
2019
 
      (unaudited)          
Civil (a)     6,411       6,113  
Labor (b)     223       1,096  
Total     6,634       7,209  

 

 

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  (a) The civil proceedings relate mainly to copyright and customer claims, including those related to the early termination of certain agreements, among others.
     
  (b) The labor proceedings to which the Company is a party were filed by former employees or suppliers and third-party service providers’ employees seeking joint liability for the acts of the Company’s suppliers and service providers.

 

On September 19, 2019, Mr. Ulisses Borges Cardinot, the non-controlling shareholder in our subsidiary, International School, filed a request for arbitration with the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada in Brazil against Arco Platform Limited, EAS Educação S.A. and Arco Educação S.A. This request for arbitration is purporting to assert the non-controlling shareholder’s rights related to the calculation of the purchase price under the Investment Agreement; however, due to its early stage, it is not possible to confirm which claims will be asserted.

 

Due to the arbitration proceeding and based on standard IAS 37 Provisions, contingent liabilities and contingent assets, the Company understands that the circumstances, risks and uncertainties of the arbitration must be taken into consideration in order to reach the best estimate of the liability. Contingencies should be reevaluated at each balance sheet date and adjusted to reflect the best current estimate. Thus, in light of the current early stage of the proceeding and the range of potential outcomes, the calculation methodology of the estimate has remained unchanged, consistent with the estimate previously calculated and reported.

 

Based on this analysis, the Company has recorded the provision at the present value of the amount considered the appropriate estimate of the amount payable to the non-controlling shareholder upon the exercise of the put option and discounted to present value. The provision is calculated based on the realized EBITDA for the school year of 2019 (first installment) and the projected EBITDA for school year of 2020 (second installment), both, net of debts, as determined in the agreement. The school year is defined as the twelve-month period starting in October of the previous year to September of the mentioned current year. The first installment would be paid in the first half of 2020 and the second installment in the first half of 2021. The Company performed a review of previous operations projections, and based on the new projected numbers, the liability increased by R$ 6,834 in 2020 and was recorded as financial expense as described in note 13a. During the three-month period ended March 31, 2020, the Company recognized R$ 10,215 of interest related to the liability.

 

The Company’s review of previous operations projections as described above was performed with no change to the accounting criteria applied to prior financial periods. The operation projections may vary in subsequent financial periods depending on the application of the agreement and the outcome of the arbitration, and the final basis of calculation of its financial liability and will be updated accordingly in its financial statements for future financial periods.

 

 

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  26 Transactions not involving cash

 

The Company carried out the non-cash activities in the three-month period ended March 31, 2020, which are not reflected in the statement of cash flows, mainly related to the effects of lease contracts signed in the period as described in Note 10.

 

  27 Subsequent events

 

Restricted Stock Units – RSU

 

On April 3, 2020, one beneficiary exercised 3,182 shares units, net of taxes, pursuant to the Restricted Shares Grant Plan, with unit value of R$296.64.

 

***

 

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