0001104659-22-064260.txt : 20220524 0001104659-22-064260.hdr.sgml : 20220524 20220524162256 ACCESSION NUMBER: 0001104659-22-064260 CONFORMED SUBMISSION TYPE: 6-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20220524 FILED AS OF DATE: 20220524 DATE AS OF CHANGE: 20220524 FILER: COMPANY DATA: COMPANY CONFORMED NAME: Arco Platform Ltd. CENTRAL INDEX KEY: 0001740594 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 000000000 STATE OF INCORPORATION: E9 FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 6-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-38673 FILM NUMBER: 22957111 BUSINESS ADDRESS: STREET 1: RUA AUGUSTA 2840 STREET 2: 9TH FLOOR, SUITE 91 CITY: SAO PAULO - SP STATE: D5 ZIP: 01412-100 BUSINESS PHONE: 55 (11) 3047-2655 MAIL ADDRESS: STREET 1: RUA AUGUSTA 2840 STREET 2: 9TH FLOOR, SUITE 91 CITY: SAO PAULO - SP STATE: D5 ZIP: 01412-100 6-K 1 tm2215666d1_6k.htm FORM 6-K

 

 

 

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 2022

 

 

 

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, 2022.

 

 

 

 

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 24, 2022      

 

 

 

EX-99.1 2 tm2215666d1_ex99-1.htm EXHIBIT 99.1

 

Exhibit 99.1

 

Arco Platform Limited

 

Unaudited interim condensed

consolidated financial statements

 

March 31, 2022

 

 

 

 

Arco Platform Limited

 

Interim condensed consolidated statements of financial position

As of March 31, 2022 and December 31, 2021

(In thousands of Brazilian reais, unless otherwise stated)

 

   Notes   March 31,2022   December 31, 2021 
       (unaudited)      
Assets               
Current assets               
Cash and cash equivalents   3    209,304    211,143 
Financial investments   4    748,329    973,294 
Trade receivables   5    806,201    593,263 
Inventories   6    158,220    158,582 
Recoverable taxes        37,409    38,811 
Derivative financial assets   13    -    301 
Related parties   7    4,693    4,571 
Other assets        76,474    66,962 
Total current assets        2,040,630    2,046,927 
Non-current assets               
Deferred income tax   21    336,839    321,223 
Recoverable taxes        22,216    22,216 
Financial investments   4    27,582    40,762 
Derivative financial assets   13    -    560 
Related parties   7    6,929    6,819 
Other assets        56,503    57,534 
Investments and interests in other entities   8    137,655    126,873 
Property and equipment   9    73,565    73,885 
Right-of-use assets   10    31,667    35,960 
Intangible assets   11    3,253,894    3,257,360 
Total non-current assets        3,946,850    3,943,192 
Total assets        5,987,480    5,990,119 
                
Liabilities               
Current liabilities               
Trade payables        132,747    103,292 
Labor and social obligations   15    171,427    157,601 
Taxes and contributions payable        6,762    7,953 
Income taxes payable        18,498    37,775 
Advances from customers   5    170,461    35,291 
Lease liabilities   10    18,513    20,122 
Loans and financing   12    26,032    228,448 
Derivative financial liabilities   13    3,452    - 
Accounts payable to selling shareholders   14    823,154    799,553 
Other liabilities        21,278    3,176 
Total current liabilities        1,392,324    1,393,211 
Non-current liabilities               
Labor and social obligations   15    295    661 
Lease liabilities   10    18,749    22,996 
Loans and financing   12    1,525,580    1,602,879 
Derivative financial liabilities   13    207,308    223,561 
Provision for legal proceedings   24    1,274    1,398 
Accounts payable to selling shareholders   14    894,234    869,233 
Other liabilities        956    946 
Total non-current liabilities        2,648,396    2,721,674 
Total liabilities        4,040,720    4,114,885 
                
Equity   16           
Share capital        11    11 
Capital reserve        2,203,857    2,203,857 
Treasury shares        (199,809)   (180,775)
Share-based compensation reserve        78,714    90,813 
Accumulated losses        (136,013)   (238,672)
Equity attributable to equity holders of the parent        1,946,760    1,875,234 
Non-controlling interests        -    - 
Total equity        1,946,760    1,875,234 
Total liabilities and equity        5,987,480    5,990,119 

 

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, 2022 and 2021

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

 

   Notes   March 31, 2022   March 31, 2021 
       (unaudited)   (unaudited) 
Revenue   18    430,037    331,672 
Cost of sales   19    (116,578)   (87,125)
         313,459    244,547 
Gross profit               
                
Selling expenses   19    (164,353)   (119,658)
General and administrative expenses   19    (86,100)   (74,306)
Other income, net        17,394    1,525 
                
Operating profit        80,400    52,108 
                
Finance income   20    159,233    9,940 
Finance costs   20    (125,101)   (38,614)
Finance result   20    34,132    (28,674)
                
Share of loss of equity-accounted investees        (5,642)   (1,023)
                
Profit before income taxes        108,890    22,411 
 Income taxes - income (expense)               
Current        (21,847)   (17,353)
Deferred        15,616    6,753 
    21    (6,231)   (10,600)
                
Net profit for the period        102,659    11,811 
                
Profit for the period attributable to:               
Equity holders of the parent        102,659    11,811 
Non-controlling interests        -    - 
                
Basic earnings per share - in Brazilian reais   17           
Class A        1.83    0.21 
Class B        1.83    0.21 
Diluted earnings per share - in Brazilian reais   17           
Class A        1.82    0.20 
Class B        1.83    0.21 

 

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, 2022 and 2021

(In thousands of Brazilian reais, unless otherwise stated)

 

                        
  Share capital   Capital reserve   Treasury shares   Share-based compensation reserve   Accumulated losses   Total equity 
Balances at December 31, 2020  11    2,200,645    -    80,817    (80,589)   2,200,884 
                              
Net profit for the period  -    -    -    -    11,811    11,811 
Total comprehensive income  -    -    -    -    11,811    11,811 
Share-based compensation plan  -    -    -    8,371    -    8,371 
Purchase of treasury shares  -    -    (53,027)   -    -    (53,027)
Investment shares transferred (Note 15)  -    -    1,801    (1,801)   -    - 
Balances at March 31, 2021 (unaudited)  11    2,200,645    (51,226)   87,387    (68,778)   2,168,039 

 

   Share capital    Capital reserve    Treasury shares   Share-based compensation reserve    Accumulated losses    Total equity 
Balances at December 31, 2021  11    2,203,857    (180,775)   90,813    (238,672)   1,875,234 
                              
Net profit for the period  -    -    -    -    102,659    102,659 
Total comprehensive income  -    -    -    -    102,659    102,659 
Share-based compensation plan  -    -    -    3,590    -    3,590 
Purchase of treasury shares (Note 16.b)  -    -    (34,723)   -    -    (34,723)
Restricted stocks transferred  -    -    15,689    (15,689)   -    - 
Balances at March 31, 2022 (unaudited)  11    2,203,857    (199,809)   78,714    (136,013)   1,946,760 

 

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, 2022 and 2021

(In thousands of Brazilian reais)

 

   March 31, 2022   March 31, 2021 
   (unaudited)   (unaudited) 
Operating activities          
Profit before income taxes   108,890    22,411 
Adjustments to reconcile profit before income taxes to cash from operations          
Depreciation and amortization   65,781    48,052 
Inventory reserves   2,399    2,224 
Allowance for expected credit losses   (6,231)   3,889 
Loss on sale/disposal of property and equipment and intangible   (78)   133 
Fair value change in financial derivatives   (11,653)   - 
Changes in accounts payable to selling shareholders   7,028    (2,188)
Share of loss of equity-accounted investees   5,642    1,023 
Share-based compensation plan   6,195    9,366 
Accrued interest on loans and financing   48,770    3,689 
Interest accretion on acquisition liability   43,930    27,381 
Income from financial investments   (20,560)   (3,766)
Interest on lease liabilities   1,161    1,019 
Provision for legal proceedings   95    646 
Provision for payroll taxes (restricted stock units)   (3,260)   (521)
Foreign exchange income (expenses), net   (105,306)   279 
Gain on changes of interest of investment   (16,413)   - 
Other financial cost/revenue, net   (923)   (359)
    125,467    113,278 
           
Changes in assets and liabilities          
Trade receivables   (206,926)   (109,075)
Inventories   2,115    3,578 
Recoverable taxes   3,182    (477)
Other assets   (8,010)   (3,931)
Trade payables   29,455    12,118 
Labor and social obligations   14,115    2,335 
Taxes and contributions payable   (1,206)   (2,804)
Advances from customers   135,170    73,783 
Other liabilities   9,424    423 
           
Cash flows from operations   102,786    89,228 
           
Income taxes paid   (42,682)   (46,988)
Interest paid on lease liabilities   (1,307)   (860)
Interest paid on accounts payable to selling shareholders   (378)   (4,153)
Interest paid on loans and financing   (15,580)   (3,567)
Net cash flows from operating activities   42,839    33,660 
           
Investing activities          
Acquisition of property and equipment   (6,672)   (2,998)
Payment of investments and interests in other entities   (18)   (25,027)
Acquisition of subsidiaries, net of cash acquired   -    (15,217)
Acquisition of intangible assets   (45,812)   (32,701)
(Purchase) maturity of financial investments   258,705    55,117 
Net cash flows from (used in) investing activities   206,203    (20,826)
           

Financing activities

          
Purchase of treasury shares   (34,723)   (53,026)
Payment of lease liabilities   (6,293)   (3,390)
Payments to owners to acquire entity’s shares   (1,977)   (18,493)
Loans and financing paid – principal   (205,803)   (1,700)
Loans and financing transaction costs   (57)   - 
Net cash flows used in financing activities   (248,853)   (76,609)
           
Foreign exchange effects on cash and cash equivalents   (2,028)   (279)
           
Decrease in cash and cash equivalents   (1,839)   (64,054)
           
Cash and cash equivalents          
At the beginning of the period   211,143    424,410 
At the end of the period   209,304    360,356 
Decrease in cash and cash equivalents   (1,839)   (64,054)

 

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

 

F-5

 

 

Notes to the unaudited interim condensed consolidated financial statements

For the three-month period ended March 31, 2022

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 Companhia Brasileira de Educação e Sistemas de Ensino S.A. (“CBE”), which provides educational content from basic to secondary education (“K-12 curriculum”). The Company’s principal administrative office is located at 2840 Rua Augusta, 9th Floor, Consolação, São Paulo, Brazil.

 

These unaudited interim condensed consolidated financial statements were authorized for issue by the Board of Directors on May 20, 2022.

 

1.2Significant events during the period

 

(a)Financial transactions

 

Loan liquidation

 

On January 3, 2022, the Company paid in full a loan through one of its subsidiaries Arco Educação, in the amount of R$ 201,883.

 

Acquisition of PGS and Mentes do Amanhã

 

On February 3, 2022, Arco concluded the acquisition of the following solutions from Pearson Education do Brasil Ltda.

 

(i) PGS: a K-12 bilingual courseware and teaching methodology, previously known as Pearson Global School; and (ii) Mentes do Amanhã (“Mentes”): a K12 supplemental solution focused on 21st century skills (social-emotional learning, financial literacy and technology).

 

The purchase consideration consists of: (i) R$ 5,507 paid in February 2022; and 

(ii) R$ 8,701 which will be settled until May 2022.

 

This transaction broadens Arco’s supplemental market presence by adding high-quality solutions with pricing complementary to its portfolio. Arco believes in the large potential for English as a Second Language and in the favorable market trends for 21st century skills. An even stronger portfolio better positions Arco to capture this demand outside Arco’s school base.

 

F-6

 

Shares repurchase

 

During the three-month period ended March 31, 2022, the Company purchased an aggregate amount of 338,718 Class A common shares for a total of approximately US$ 6.6 million. This repurchase was made in accordance with the Repurchase Program mentioned in Note 16.

 

(b)Information related to Covid-19 pandemic

 

In January 2021, the COVID vaccine began to be applied in Brazil. Vaccination started with the priority groups: health workers, the elderly, the disabled and indigenous villagers. Currently the vaccine is available to all the adult population in Brazil and children above the age of 5 years old, and the vaccination campaign has maintained a rapid pace since its beginning.

 

After the holiday celebrations at the end of 2021, there was an increase in the number of COVID-19 cases in Brazil. During January 2022, state and municipal governments took restrictive measures to contain a possible new wave of the virus. These measures have been relaxed as the number of cases decreased compared to the beginning of the year.

 

Currently, the Country presents an optimistic scenario and is believed to be closer to the end of the pandemic, since on average 85,9% of the Brazilian population are vaccinated with at least the first dose, and about 77,2% of the population are fully vaccinated according to information from Brazilian health authorities.

 

The initial restrictive measures taken by Brazilian states and local authorities directly impacted the education industry by indefinitely postponing on-site school activities at the beginning of the pandemic. However, in 2022 school activities returned to the presential modality. The mandatory use of masks is occurring in stages, with restrictions over some activities being gradually released.

 

Notwithstanding the above, despite the gradual release of the restrictions by the authorities, most of the Company’s workforce is working on site applying a hybrid model. The Company continues putting in place protocols to safeguard the health and safety of the Company’s employees, customers, and suppliers. The alternative working arrangements have not adversely affected financial reporting systems, internal control over financial reporting or disclosure controls and procedures.

 

As of March 31, 2022, the Company did not recognize any additional expenses related to COVID-19, mainly due to flexibility of restricted measures and the high percentage of the target population vaccinated in Brazil.

 

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

 

F-7

 

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

 

An increase in bad debts due to the current economic scenario.

 

An adverse change in the fair value of financial instruments recognized on the Company’s books.

 

The need for renegotiation of loans and lease agreements to ensure the continued strength of the Company’s financial position.

 

The Company does not expect to incur additional expenses from COVID-19, but Management will continue to monitor and assess the impact COVID-19 may have on the Company’s business operations, financial performance, financial position, and cash flows.

 

2Significant accounting policies

 

2.1 Basis for preparation of the 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, 2021, 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, 2021.

 

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, 2021.

 

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 judgments, estimates and assumptions to the Company’s consolidated financial statements for the year ended December 31, 2021.

 

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.

 

F-8

 

2.2 Changes in accounting policies and disclosures

 

New and amended standards and interpretations

 

Several new or amended standards became applicable for the current reporting period. The Company did not have to change its accounting policies or make retrospective adjustments as a result of adopting these new or amended standards.

 

Standards issued but not yet effective

 

The new and amended standards and interpretations that are issued, but not yet effective, up to the date of issuance of the Company’s financial statements are disclosed below. The Company intends to adopt these new and amended standards and interpretations, if applicable, when they become effective. The Company is assessing the impact that changes in the standards will have in current practice, but does not expect a significant or any impact to occur on the Company's financial statements:

 

Definition of Accounting Estimates (Amendments to IAS 8)
Deferred Tax related to Assets and Liabilities arising from a Single Transaction (Amendments to IAS 12)
IFRS 17 Insurance Contracts
Classification of liabilities as current or non-current (amendments to IAS 1)
Reference to the Conceptual framework (amendments to IFRS 3)
Property, plant and equipment - proceeds before intended use (amendments to IAS 16)
Onerous contracts - cost of fulfilling a contract (amendments to IAS 37)
Annual improvements to IFRS standards 2018-2020
Disclosure of accounting policies (amendments to IAS 1 and IFRS Practice Statement 2)

 

3Cash and cash equivalents

 

  

March

31, 2022

  

December

31, 2021

 
   (unaudited)     
Cash and bank deposits   16,281    20,085 
Bank deposits in foreign currency (a)   2,853    154 
Cash equivalents (b)   190,170    190,904 
    209,304    211,143 

 

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

 

(b)Cash equivalents correspond to financial investments in Bank Certificates of Deposit (“CDB”) issued by highly credit-rated financial institutions. As of Mach 31, 2022, the average interest on these CDBs was equivalent to 92.0% (December 31, 2021: 90.4%) of the Interbank Certificates of Deposit (“CDI”). The average CDI rate for twelve-months period ended March 31, 2022 was 6.40% (December 31, 2021: 4.39%) These financial investments are available for immediate use and have insignificant risk of changes in value.

 

F-9

 

4Financial investments

 

  

March

31, 2022

   December 31, 2021 
   (unaudited)     
Financial investments (a)   775,405    1,013,550 
Other   506    506 
    775,911    1,014,056 
Current   748,329    973,294 
Non-current   27,582    40,762 

 

(a)Financial investments correspond mainly to investments in bank deposit certificates (CDB) and automatic applications, managed by highly credit-rated financial institutions. As of March 31, 2022, the average interest on these investments is equivalent to 101.6% (2021: 101.7%) of the CDI. The average CDI rate for the twelve-months period ended March 31, 2022 was 6.40% (December 31, 2021: 4.39%).

 

5Trade receivables

 

  

March

31, 2022

  

December

31, 2021

 
   (unaudited)     
From sales of educational content   883,666    676,787 
From related parties (Note 7)   3,436    3,608 
    887,102    680,395 
(-) Allowance for expected credit losses   (80,901)   (87,132)
    806,201    593,263 

 

As of March 31, 2022, and December 31, 2021, the aging of trade receivables was as follows:

 

  

March

31, 2022

  

December

31, 2021

 
   (unaudited)     
Neither past due nor impaired   779,216    567,490 
           
Past due   107,886    112,905 
           
1 to 60 days   32,596    15,383 
61 to 90 days   10,134    8,403 
91 to 120 days   3,128    10,347 
121 to 180 days   6,756    16,284 
More than 180 days   55,272    62,488 
    887,102    680,395 

 

F-10

 

The movement in the allowance for expected credit losses for the three-month periods ended March 31, 2022 and 2021, was as follows:

 

  

March

31, 2022

  

March

31, 2021

 
   (unaudited)   (unaudited) 
Balance at beginning of the period   (87,132)   (63,434)
(Additions) reversals   6,231    (3,889)
Receivables written off during the period as uncollectible   -    4 
Balance at end of period   (80,901)   (67,319)

 

Advances from customers

 

The Company receives advance from customers mainly at the beginning of the year when parents purchase educational content for the current school year. The educational content is delivered in up to four stages, and as the material is delivered, revenue is recognized, and the advance from customers is offset.

 

As of March 31, 2022, the Company has R$170,461 (R$35,291 in December 2021) of advances from customers recorded in liabilities for which the material was not delivered in the current period.

 

The increase of the balance is due the growth on the business to consumer (B2C) sales model which represents 28.5% of revenue as of March 31, 2022 (17.8% as of March 31, 2021).

 

6Inventories

 

  

March

31, 2022

  

December

31, 2021

 
   (unaudited)     
Educational content   71,833    75,778 
Educational content in progress (a)   74,983    71,314 
Consumables and supplies   2,285    2,128 
Inventories held by third parties   9,119    9,362 
    158,220    158,582 

 

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

 

F-11

 

7Related parties

 

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

 

  

March

31, 2022

  

December

31, 2021

 
Assets   (unaudited)      
Trade receivables          
Livraria ASC Ltda. and Educadora ASC Ltda. – Note 5 (a)   3,436    3,546 
OISA Tecnologia e Serviços Ltda. (d)   -    62 
    3,436    3,608 
Other assets          
Arco Instituto de Educação (b)   1,794    1,373 
    1,794    1,373 
Loans to related parties          
Minority shareholders - Geekie (c)   4,693    4,571 
Minority shareholders - EI (e)   6,909    6,750 
Former shareholders - Eduqo (f)   4    4 
Former shareholders - Edupass (f)   16    65 
    11,622    11,390 
Current   4,693    4,571 
Non-current   6,929    6,819 
           
Liabilities          
Advances from customers          
Livraria ASC Ltda. and Educadora ASC Ltda. (a)   -    9 
    -    9 
Other liabilities          
OISA Tecnologia e Serviços Ltda. (d)   11    258 
    11    258 

 

  

March

31, 2022

  

March

31, 2021

 
   (unaudited)   (unaudited) 
Revenue          
Livraria ASC Ltda. and Educadora ASC Ltda. (a)   1,873    1,829 
OISA Tecnologia e Serviços Ltda. (d)   2    5 
    1,875    1,834 
           
Finance income          
Geekie Partners S.A. (c)   122    22 
OISA Tecnologia e Serviços Ltda.   -    19 
Minority shareholders - EI (e)   159    87 
    281    128 

 

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

 

(b)Arco is a founding member of Instituto Arco de Educação ("Arco Instituto"), a non-profit association whose purpose is to support and encourage education through the generation of knowledge. The Company has amounts receivable from Arco Instituto arising from the reimbursement of expenses paid by Arco. The amounts are not subject to financial charges and the payment term is under negotiation between the parties.

 

(c)On January 17, 2019, the Company loaned R$ 4,000 to the current minority 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, 2022, the Company recognized R$ 122 of interest income. The transaction was intended to support Geekie’s working capital needs.

 

(d)WPensar provides financial intermediation services to OISA. Amounts collected by WPensar are transferred to OISA net of the value of the service provided. As of March 31, 2022, the amount to be transferred to OISA is R$ 11 and during the three-month period the recognized revenue from financial intermediation was R$ 2.

 

(e)Amount due from minority shareholders of Escola da Inteligência, with an interest rate of 100% CDI and maturing in May 2023. During the three-month period ended March 31, 2022, the Company recognized R$ 159 of interest income.

 

(f)Amount due from former shareholders of Eduqo and Edupass, which the payment is under negotiation between the parties. These amounts are not subject to financial charges.

 

F-12

 

Key management personnel compensation

 

Key management personnel compensation comprised the following:

 

  

March

31, 2022

  

March

31, 2021

 
   (unaudited)   (unaudited) 
Short-term employee benefits   23,408    18,688 
Share-based compensation plan   10,321    10,729 
    33,729    29,417 

 

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

 

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

 

8Investments and interests in other entities

 

(a)Investments

 

Bewater Ventures I GA Fundo de Investimento em Participações Multiestratégia (“Bewater”)

 

On July 24, 2020, the Company, through its subsidiary Companhia Brasileira de Educação e Sistemas de Ensino S.A. (“CBE”) acquired 9,670 Class B quotas of Bewater Ventures I GA Fundo de Investimento em Participações Multiestratégia, a fund managed by Paraty Capital. The Company paid R$ 9,670, corresponding to a total interest of 14.5% in Bewater. On February 2, 2021, Bewater carried out a new round of capital injection, in which the Company acquired an additional 27 class B quotas, resulting in an 11.1% interest in the fund due to the dilution of its interest. On August 12, 2021, Bewater had a new round of investments, in which the Company acquired an additional 16 class B quotas, resulting in an 11.0% interest in the fund. On February 17, 2022, the Company acquired 19 class B quotas, in a new round of investments, keeping its 11.0% interest in the fund.

 

The fund made a minority investment in Group A, a company that provides educational solutions for higher education. The investment in Bewater is measured at fair value through profit and loss.

 

INCO Limited (“INCO”)

 

On January 25, 2021, the Company entered into a Share Purchase Agreement with INCO Limited, or INCO, the controlling entity of OISA, a company that provides financial and administrative services to private schools, according to which 8,571,427 series B ordinary shares were acquired, equivalent to 30% of the total stock capital of INCO, for a total amount of R$25,000. On April 27, 2021, Arco invested R$ 33,195 and an additional R$ 52,035 on September 27, 2021. In January 2022, INCO received a new capital contribution, in which the Company did not participate and now holds an 25.06% interest due to the dilution of its interest.

 

F-13

 

Due to the increase in the INCO's equity from capital contribution mentioned above, as of March 31, 2022, the Company had a gain of R$ 16,413. This amount is recognized in Other income (expenses) in profit and loss.

 

Based on the signed agreement, the Company does not have control of INCO but exercises significant influence over the entity since it is one of the four members of INCO’s Board of Directors.

 

Tera Treinamentos Profissionais Ltda (“Tera”)

 

On April 9, 2021, the Company entered into a Share Purchase Agreement with Tera Treinamentos Profissionais Ltda, a company that provides professional courses focused on the development of digital skills, according to which 8,234 shares were acquired, equivalent to 23,43% of the total stock capital of Tera, for a total amount of R$15,000. Based on the signed agreement, the Company does not have control of Tera but exercises significant influence over the entity.

 

F-14

 

 

9Property and equipment

 

Reconciliation of carrying amount:

 

                               March 31, 2022   March 31, 2021 
                               (unaudited)   (unaudited) 
   Machinery and equipment   Vehicles   Furniture and fixtures   IT equipment   Facilities   Leasehold improvements   Others   Total   Total 
Cost                                             
At the beginning of the period   2,387    307    4,531    69,166    235    15,909    7,390    99,925    40,445 
Additions   113    (11)   112    6,397    -    84    (23)   6,672    2,998 
Business combination   -    -    -    -    -    -    -    -    145 
Disposals   -    -    -    -    -    -    (2)   (2)   (167)
At the end of the period   2,500    296    4,643    75,563    235    15,993    7,365    106,595    43,421 
                                              
Depreciation                                             
At the beginning of the period   (612)   (198)   (1,158)   (8,005)   (50)   (9,035)   (6,982)   (26,040)   (14,358)
Depreciation charge for the period   (98)   (3)   (169)   (5,273)   (6)   (1,173)   (348)   (7,070)   (2,623)
Depreciation of disposals   -    -    -    -    -    -    80    80    41 
At the end of the period   (710)   (201)   (1,327)   (13,278)   (56)   (10,208)   (7,250)   (33,030)   (16,940)
                                              
Net book value                                             
At the beginning of the period   1,775    109    3,373    61,161    185    6,874    408    73,885    26,087 
At the end of the period   1,790    95    3,316    62,285    179    5,785    115    73,565    26,481 
                                              
Annual depreciation rates   10%   20%   10%   31%   10%   20% to 33%    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, 2022 and 2021.

 

F-15

 

10Leases

 

The balance sheet shows the following amounts relating to leases:

 

   March
31, 2022
   December
31, 2021
 
   (unaudited)     
Right-of-use assets          
Properties   30,972    35,221 
Machinery and equipment   695    739 
    31,667    35,960 

 

   March
31, 2022
   December
31, 2021
 
   (unaudited)     
Lease liabilities          
Current   18,513    20,122 
Non-current   18,749    22,996 
    37,262    43,118 

 

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,
2022
   March 31,
2021
 
   (unaudited)   (unaudited) 
Right-of-use assets          
At the beginning of the period   35,960    30,022 
Additions   604    7,927 
Disposal   -    (64)
Lease modification (a)   -    200 
Depreciation expense   (4,897)   (3,424)
Business combination   -    112 
At the end of the period   31,667    34,773 
           
Average annual depreciation rate   29.0%   28.4%

 

    March
31, 2022
    March
31, 2021
 
    (unaudited)     (unaudited)  
Lease liabilities                
At the beginning of the period     43,118       35,220  
Additions     604       7,927  
Disposal     -       (70 )
Lease modification (a)     -       200  
Business combination     -       112  
Interest expense     1,161       1,019  
Payments of lease liabilities     (6,293 )     (3,258 )
Discounts on leases     (21 )     (132 )
Interest paid     (1,307 )     (860 )
At the end of the period     37,262       40,158  

 

(a) Refers to price adjustments that occur annually as defined in the lease agreements.

 

F-16

 

The Company entered into a fiduciary agreement with Banco Safra S.A. in the amount of R$ 10,903 to guarantee payment due on the lease agreements of the São Paulo office. This financial agreement bears interest at the rate of 1.95% per annum. The lease payments are adjusted annually by the General Market Price Index (IGP-M).

 

The Company recognized rent expense from short-term leases and low-value assets of R$ 658 for the three-month period ended March 31, 2022 (March 31, 2021: R$ 2,252).

 

F-17

 

11Intangible assets and goodwill

 

                                           March 31, 2022   March 31, 2021 
                                           (unaudited)   (unaudited) 
   Goodwill   Rights on contracts   Customer relationships   Educational system   Copyrights   Software license and development   Trademarks   Educational platform   Non-compete agreement   In Progress   Total   Total 
Cost                                                            
At the beginning of the period   1,949,901    15,263    348,340    326,136    37,553    98,900    542,705    308,401    18,291    2,072    3,647,562    2,747,947 
Acquisitions (a)   -    -    -    -    1,395    10,281    14,234    24,584    126    3,893    54,513    32,701 
Disposals   -    -    -    -    -    -    -    -    -    -    -    (252)
Business combinations   -    -    -    -    -    -    -    -    -    -    -    40,130 
Finalization of price allocation (b)   -    -    -    -    -    -    -    -    -    -    -    (4,000)
Transfer   -    -    -    -    -    -    -    4,861    -    (4,861)   -    - 
At the end of the period   1,949,901    15,263    348,340    326,136    38,948    109,181    556,939    337,846    18,417    1,104    3,702,075    2,816,526 
                                                             
Amortization                                                            
At the beginning of the period   -    (8,553)   (73,605)   (82,857)   (26,134)   (26,291)   (53,874)   (112,895)   (5,993)   -    (390,202)   (198,310)
Amortization   -    (494)   (9,199)   (9,332)   (1,855)   (5,862)   (7,710)   (22,492)   (1,035)   -    (57,979)   (42,878)
Amortization of disposals   -    -    -    -    -    -    -    -    -    -    -    239 
At the end of the period   -    (9,047)   (82,804)   (92,189)   (27,989)   (32,153)   (61,584)   (135,387)   (7,028)   -    (448,181)   (240,949)
                                                             
Net book value                                                            
At the beginning of the period   1,949,901    6,710    274,735    243,279    11,419    72,609    488,831    195,506    12,298    2,072    3,257,360    2,549,637 
At the end of the period   1,949,901    6,216    265,536    233,947    10,959    77,028    495,355    202,459    11,389    1,104    3,253,894    2,575,577 
                                                             
Annual amortization years   -    10    5 to 16    3 to 10    3    2 to 5    10 to 20    3 to 10    2 to 5    -           

 

(a)The acquisitions of the period are mainly due to the development of educational content from the 2022 school year, development of technology platforms for the supply of digital content, as well as licenses and software development for new projects.

 

(b)Refers to Geekie purchase price allocation adjustment made upon completion of the calculation of the fair value of intangible assets in accordance with the period defined by IFRS 3. During the measurement period, the Company obtained new information about facts and circumstances that existed at the acquisition date and recognized an adjustment in goodwill and accounts payable to selling shareholders to reflect the new information obtained.

 

F-18

 

(a)Goodwill

 

The carrying amount of goodwill by operating segment was:

 

    March
31, 2022
   December
31, 2021
 
    (unaudited)     
Core    1,474,166    1,474,166 
Supplemental    475,735    475,735 
     1,949,901    1,949,901 

 

Impairment test for goodwill

 

The Company performs its annual impairment test in the last quarter of the previous year 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, 2021.

 

There were no indicators of impairment for the three-month periods ended March 31, 2022.

 

(b)Other intangible assets

 

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

 

For the three-month period ended March 31, 2022 there were no indicators that the Company’s intangible assets with definite lives might be impaired.

 

12Loans and financing

 

   Interest rate  Maturity   March
31, 2022
   December
 31, 2021
 
Bank loan  100% CDI + 2.7% pa   January/2022    -    201,990 
Bank loan  8.1% pa   March/2022    -    310 
Debentures (a)  100% CDI + 1.7% pa   August/2023    947,174    919,703 
Bank loan (b)  3.7% pa   October/2023    52    62 
Bank loan (c)  3.8% pa   October/2023    76    90 
Bank loan  3.8% pa   November/2023    43    49 
Bank loan (d)  USD + 2.4% pa   October/2024    48,014    61,649 
Convertible notes (e)  8.0% pa   November/2028    556,253    647,474 
            1,551,612    1,831,327 
Current           26,032    228,448 
Non-current           1,525,580    1,602,879 

 

(a)This amount is related to issuance of debentures in August 2021 to pay the amount due on the COC and Dom Bosco acquisition and will be settled in a single installment on August 25, 2023. The debentures bear interest of 100% CDI + 1.7% per annum, which will accrue and will also be payable on August 25, 2023. The debentures are guaranteed by Arco Educação S.A.

 

F-19

 

(b)Loan acquired by Me Salva!, the Company’s subsidiary, for working capital. The amount will be settled in 3 installments until October 2023 and bear interest at the rate of 3.7% per annum.

 

(c)Loan acquired by Eduqo, the Company’s subsidiary, for working capital. The amount is being paid monthly until October 2023 and bear interest at the rate of 3.8% per annum.

 

(d)On November 11, 2021, the subsidiary Geekie entered into a loan agreement in the amount of US$ 11,020 thousand, equivalent to R$ 60,000, with an interest rate of 2.452% per annum. Since the operation was contracted in U.S. dollars, the Company holds swap derivatives to protect its exposure to foreign currency risk, which changes the effective interest rate for this loan to 100% CDI + 1.7% per annum. The loan payments are due quarterly in 12 installments, until October 28, 2024. The decrease in the current balance is mainly related to: (i) payment of R$ 5,455 related to first installment in February 2022; and (ii) exchange variation of R$ 8,680 recognized as financial income in statement of income.

 

(e)On November 30, 2021, the Company issued convertible senior notes in the amount of US$ 150,000 with a value per share of $1.00, equivalent to R$ 825,285. These notes mature in 7 years, on November 15, 2028, and bear interest at 8% per year fixed in Brazilian reais. While the interests are payable quarterly, the principal amount will be paid in a single installment at the mature date, both in cash in United States dollars equivalents to the amount in Brazilian reais at the payment date.

 

Each note can be converted at any time during the term of the contract, at the option of the holders, into Arco’s Class A common shares at the agreed conversion rate, which is equivalent to an initial price of US$ 29 per share. Dragoneer and General Atlantic will beneficially own approximately 5.6% and 2.8%, respectively, of the total shares of Arco (on an as-converted basis for the convertible senior notes). See Note 13 for further information.

 

The holders also have the right to require the Company to repurchase for cash, on any date on or after November 15, 2026, all or portion of the holders’ notes, at a repurchase price that is equal to 100% of the principal amount of the notes to be repurchased, plus accrued and unpaid interests.

 

The Company determined that the convertible senior notes have an embedded put option to repurchase the convertible notes for cash. It is an embedded derivative that is not closely related to the contract host debt instrument, because the risks inherent in the derivative (equity risk) and the host are dissimilar. Therefore, the conversion option will be treated separately and classified as a derivative liability, see Note 13 for further information.

 

The host foreign currency debt will be measured subsequently at amortized cost, using the effective interest rate of 3.61% per annum, and thus is subject to foreign exchange changes.

 

The decrease in current balance is mainly due to exchange variation of R$ 98,654 recognized as financial income in statement of income. The remain variation is related to interest provisioned in the period.

 

All financing arranged by the Company is not subject to any financial covenants as of March 31, 2022.

 

F-20

 

 

13Derivative financial assets and liabilities

 

The breakdown of financial derivatives is as follows:

 

    March
31, 2022
    December
31, 2021
 
Assets                
Financial derivatives                
Swap Geekie (a)     -       861  
      -       861  
Current     -       301  
Non-current     -       560  
                 

 

   March
31, 2022
   December
31, 2021
 
Liabilities          
Financial derivative          
Swap Geekie (a)   10,281    - 
Put option (b)   200,479    223,561 
    210,760    223,561 
Current   3,452    - 
Non-current   207,308    223,561 

 

(a)On November 11, 2021, subsidiary Geekie entered into swap contracts to protect a foreign currency loan, with maturities between February 2022 to October 2024, which the active end receives, on average, dollar plus 2.452% per annum and in the liability position it pays, on average, CDI plus 1.7% per annum. During the three-month period ended March 31, 2022 the Company recognized a net financial expense of R$ 11,860 as fair value adjustment in the statement of income. The Company also paid R$ 282 in February 2022, related to the first installment.

 

(b)Dragoneer and General Atlantic have a put option to convert their investment in the Company’s senior notes into Class A shares of the Company. The fair value of the put option is calculated using the Black & Scholes method as of March 31, 2022.

 

The Company recognized an initial put option of US$32,995 separated from the fair value of the total compound financial instrument issued, comprising the senior notes and the put option. The Company recognize a net fair value adjustment of R$ 23,082 as finance income in profit and loss as of March 31, 2022. See Note 12 for further information.

 

F-21

 

14Accounts payable to selling shareholders

 

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

 

   March
31, 2022
   December 
31, 2021
 
   (unaudited)     
Accounts payable to selling shareholders          
Acquisition of International School (a)   388,324    379,501 
Acquisition of NS Educação Ltda. (b)   4,268    6,126 
Acquisition of Positivo (c)   772,743    754,451 
Acquisition of Studos (d)   5,610    5,472 
Acquisition of EI (e)   245,635    234,493 
Acquisition of Geekie (f)   232,479    224,759 
Acquisition of Me Salva! (g)   22,916    21,880 
Acquisition of Eduqo (h)   19,994    18,145 
Acquisition of Edupass (i)   25,419    23,959 
    1,717,388    1,668,786 
Current   823,154    799,553 
Non-current   894,234    869,233 

 

(a)The amount payable is subject to an arbitration process and will be paid when the arbitration mentioned in Note 24 is completed. The amount payable is based on realized EBITDA for the 2019 and 2020 school years. During the three-month period ended March 31, 2022 the Company recognized R$ 8,823 of interest.

 

(b)This amount was retained for any contingent liabilities that may arise, which final payment will be released in December 2022. In 2022, the Company paid R$ 1,871 related to settling of annual instalments. The amount is being adjusted based on the Interbank certificates of deposit (CDI) interest rate. During the three-month period ended March 31, 2022, the Company recognized R$ 13 of interest.

 

(c)The amount represents the outstanding balance of the acquisition price and will be paid annually in November over 3 years (25% payable in 2022 and 75% payable in 2023 and 2024). The payment is secured by a chattel mortgage of 20% of CBE shares and 100% of SAE shares. The outstanding amount is updated by CDI. During the three-month period ended March 31, 2022, the Company recognized R$ 18,292 of interest.

 

(d)The obligation is recognized at present value of the acquisition price using an estimated interest rate of 8.2% for the last installment due in September 2022.

 

(e)The obligation is recognized at present value of the acquisition price using an estimated interest rate of 8.2% for the last installment due in September 2022.

 

This amount is related to the acquisition of the remaining 40% interest in EI and will be paid in May 2023 subject to price adjustments. This amount is recorded at the present value using an estimated interest rate of 11.9% (13.4% in 2021). The installment is payable on May 31, 2023 for 6 times EI’s ACV book value for 2023 plus cash generation and multiplied for 40%.

 

During the three-month period ended March 31, 2022 the Company recognized R$ 6,617 of interest and the accounts payable increased by R$ 4,525.

 

(f)The financial liability is recorded at the present value of the estimated amount payable to the non-controlling shareholder upon the exercise of purchasing of the remaining interest using an estimated interest rate of 13.7%. The exercise price will be calculated for two different contents (“Geekie One” and “Geekie Others”) and is determined by the greater of:

 

Geekie One: 8 times Geekie’s ACV book value for 2022 less net debt, multiplied by the remaining interest of sellers; or 0.65 times the multiple of the Company’s ACV book value for 2022, multiplied by Geekie’s ACV for 2022, less net debt, multiplied by the remaining interest of sellers. The amount is due on June 1, 2022.

 

F-22

 

Geekie Others: 8 times Geekie’s revenue for 2022 multiplied by the remaining interest of sellers; or 0.65 times the multiple of the Company’s ACV book value for 2022, multiplied by Geekie’s revenue for 2022, multiplied by the remaining interest of sellers. The amount is due on January 6, 2023.

 

During the three-month period ended March 31, 2022 the Company recognized R$ 6,617 of interest and the accounts payable increased by R$ 1,103.

 

(g)The liability is composed of the present value of the balance payable for the remaining 40% interest in Me Salva!, plus the retained amount defined in the contract. The balance is recognized at present value, using a discount rate of 12.4% (13.7% in 2021). The payment of the retained portion is in the amount of R$ 1,124 and will be made in 4 equal annual installments, in June of each year until 2026. The payment of the second stage will be made in 2025 and the acquisition price of 40% is calculated based on the estimated 2024 revenue multiplied by 3, less net debt. During the three-month period ended March 31, 2022 the Company recognized an interest expense of R$ 778 and the accounts payable increased by R$ 742.

 

(h)The liability is composed of the present value of the balance payable for the outstanding installments for settlement of the 100% participation acquired from Eduqo, plus the price adjustments and earn out amount defined in the contract. The balance is recognized at present value, using a discount rate of 13.7% (14.3% in 2021). The payment of the outstanding installments in the amount of R$ 17,097 and the earn out of R$2,896 will be made in 2 annual installments, in July of 2022 and 2023. The price adjustment of R$ 882 will be paid in a single installment in July 2022. The earn-out is calculated based on the estimated 2022 and 2023 revenue, plus cash generation. During the three-month period ended March 31, 2022 the Company recognized an interest expense of R$ 1,849.

 

(i)The liability is composed of the present value of the balance payable for the outstanding installments for settlement of the 100% participation acquired from Edupass, plus the earn out amount defined in the contract. The balance is recognized at present value, using a discount rate of 13.7% (15.3% in 2021). The payment of the outstanding installments is in the amount of R$ 2,212 and will be made in 2 annual installments, in September 2022 and 2023, while the payment of the earn out will be made in March 2024, in the amount of R$ 23,207. The earn out is calculated based on the estimated 2023 revenue. During the three-month period ended March 31, 2022 the Company recognized an interest expense of R$ 802 and the accounts payable increased by R$ 658.

 

15Labor and social obligations

 

   March
31, 2022
   December
31, 2021
 
   (unaudited)     
Labor and social obligations          
Bonuses (a)   26,199    30,789 
Payroll and social charges   94,037    96,343 
Payroll accruals   43,209    24,225 
Other labor   8,277    6,905 
    171,722    158,262 
Current   171,427    157,601 
Non-current   295    661 

 

F-23

 

(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$13,238 during the three-month period ended March 31, 2022 (2021: R$ 7,337).

 

(b)Share-based compensation plan

 

Geekie Plan

 

The beneficiaries exercised the options on March 31, 2022, which is under review for its payment until June 2022.

 

The fair value of the plan is calculated using the same valuation method as the accounts payable to selling shareholders for the acquisition of the remaining interest.

 

Although the valuation used in both calculations is the same, Arco recorded accounts payable to selling shareholders, and Geekie recorded stock options for employees who remained in the company after the acquisition without the possibility of liquidation in equity as labor and social obligations.

 

Restricted stock units

 

In 2019 the Company implemented a new share-based payment program called restricted stock units (“RSU”) of the holding company Arco Platfom Limited for employees of the Company's subsidiaries and members of the Board of Directors, which will be available for sale by the beneficiaries annually, on their anniversary dates, except for the members of the Board, whose shares are restricted for sale for one year after vesting.

 

The participant's right to effectively receive ownership of the restricted shares will be conditioned to the participant's continuance and performance as an employee, director or director of any company in the business group from the grant date until vesting. If a participant leaves the group or does not achieve the proposed performance goal, the participant will be entitled to receive his or her vested shares and a pro rata amount of the granted and unvested shares, by reference to the vesting period in which the termination occurred and based on the number of days the participant was employed by us. The total amount will be calculated based on the proposed goal multiplied by a rate between 80% and 120%. After the vesting period, the restricted shares have the same rights and privileges as any shareholder.

 

The following table reflects the movements of outstanding shares from the grant date until March 31, 2022:

 

   Number of
restricted
stock units
 
Outstanding at December 31, 2021   142,184 
Granted (a)   2,404 
Restricted stocks units transferred   (40,131)
Estimated forfeited   3,682 
Outstanding at March 31, 2022   108,139 

 

(a)These shares granted are adjusted accordingly to a performance program, which can increase or reduce the number of shares that will be transferred after the vesting period.

 

The total compensation expense for the three-month period ended March 31, 2022, including taxes and social charges, was R$10,321, (R$3,590 of principal and R$6,731 of taxes and contributions) net of estimated forfeitures. These awards are classified as equity settled.

 

F-24

 

 

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

 

Grant

date (a)

  Final
vesting
date
  Vesting period (% per year)  Total
shares
granted
   Total
shares
cancelled
   Total shares vested (b)   Total shares outstanding   Average fair value at grant date   Unit value average 
30/04/2019  28/09/2021  3 years (33.33%)   542,760    (76,277)   (466,483)   -    68,800    126.76 
30/06/2019  30/06/2020  1 year (100%)   1,543    -    (1,543)   -    319    206.66 
30/06/2019  30/06/2020  1 year (100%)   1,543    -    (1,543)   -    274    177.71 
15/10/2019  28/09/2021  3 years (33.33%)   37,929    (7,683)   (30,245)   -    7,593    200.18 
23/01/2020  28/09/2022  3 years (33.33%)   13,000    -    (10,851)   3,910    2,788    214.48 
02/03/2020  28/09/2022  3 years (33.33%)   36,673    (1,442)   (29,583)   10,279    8,762    238.93 
04/03/2020  28/09/2021  3 years (33.33%)   13,164    -    (13,164)   -    3,346    254.21 
03/09/2020  28/09/2022  3 years (33.33%)   3,600    (1,687)   (1,913)   -    883    245.18 
19/11/2020  30/06/2022  1 year (100%)   3,562    (984)   (2,302)   1,781    772    216.63 
19/11/2020  30/06/2021  1 year (100%)   3,086    -    (3,086)   -    669    216.63 
10/02/2021  31/03/2023  3 years (33.33%)   8,400    -    (5,199)   2,054    1,723    205.11 
10/02/2021  31/03/2024  4 years (20%, 20%, 30%, 30%)   50,200    -    (18,856)   24,242    10,296    205.11 
23/02/2021  30/06/2022  1 year (100%)   1,838    -    (1,498)   1,838    366    198.87 
26/02/2021  31/03/2024  4 years (20%, 20%, 30%, 30%)   9,366    (1,145)   (3,460)   4,296    1,841    196.58 
15/04/2021  30/06/2022  1 year (100%)   1,836    -    (1,457)   1,836    291    158.28 
01/06/2021  31/03/2024  4 years (20%, 20%, 30%, 30%)   475    (74)   (171)   208    70    148.28 
24/06/2021  31/12/2021  1 year (100%)   89,808    (548)   (89,530)   -    14,837    165.21 
30/09/2021  31/03/2024  4 years (20%, 20%, 30%, 30%)   5,000    -    (1,814)   2,204    590    118.02 
30/09/2021  28/09/2023  3 years (33.33%)   3,000    -    (1,499)   1,787    354    118.02 
30/09/2021  31/03/2024  4 years (20%, 20%, 30%, 30%)   4,000    -    (1,475)   1,827    472    118.02 
30/09/2021  31/03/2025  4 years (20%, 20%, 30%, 30%)   75,000    -    (12,308)   49,489    8,852    118.02 
30/09/2021  31/12/2021  1 year (100%)   3,107    -    (3,031)   -    367    118.02 
30/09/2021  30/06/2022  1 year (100%)   1,543    -    (1,029)   1,392    182    118.02 
30/09/2021  30/09/2021  1 year (100%)   167    -    (167)   -    20    118.02 
25/03/2022  31/03/2024  3 years (40%, 30%, 30%)   2,000    -    (800)   996    194    96.84 
25/03/2022  31/03/2022  1 year (100%)   500    -    (500)   -    48    96.84 
Total         913,100    (89,840)   (703,507)   108,139    134,709      

 

F-25

 

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

 

(b)Includes the number of Restricted Shares pro rata in relation to the vesting period not yet fulfilled, based on the number of days the participant worked for the Company during such vesting period until the closing of these financial statements, whose Restricted Shares will be transferred to the participant only after the vesting period has been completed or in the event of contractual termination.

 

Matching program

 

On February 26, 2021, the Company’s Restricted Shares Plan Advisory Committee approved the Company’s first Matching Program, pursuant to which the Company will match the number of Class A shares (at no additional cost to the participant) that were acquired by the participant at fair market value (“investment shares”), using the amounts received by the participant as a short term incentive and designated by the Company’s board of directors to be used as an investment in investment shares, provided certain vesting conditions are satisfied.

 

Under the matching shares program, participants are required to (i) be employed or providing services to the Company through each vesting date, as set forth in the applicable award agreement and (ii) hold the investment shares through each vesting date. The vesting period may not exceed five years. In addition, upon each vesting date, a portion of the investment shares will become free of restrictions and the participant will be allowed to freely sell such shares.

 

All Class A shares, including the investment shares acquired by the participants of the Matching Program, will be available for sale by the beneficiaries annually, over four years, on March 31 of each year.

 

16Equity

 

a.Share capital

 

As of March 31, 2022, and December 2021, Arco’s share capital is represented by 56,851,399 common shares of par value of US$ 0.00005 each, comprised of 27,400,848 Class B common shares and 29,450,551 Class A common shares.

 

F-26

 

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

 

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

 

b.Treasury shares

 

Repurchase program

 

On January 6, 2021, the Company’s Board of Directors approved a share repurchase program, or the Repurchase Program, to comply with management long-term incentive plan obligations. Pursuant to the Repurchase Program, the Company may repurchase up to 500,000 of our outstanding Class A common shares in the open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on January 6, 2021, continuing until the earlier of the completion of the repurchase or January 6, 2023, depending upon market conditions.

 

On March 31, 2021, the Company approved to increase the share repurchase limit of its existing share repurchase program established on January 6, 2021. Pursuant to the increased repurchase limit, Arco may repurchase up to 2,500,000 million of its outstanding Class A common shares in the open market, based on prevailing market prices, or in privately negotiated transactions, over a period beginning on March 31, 2021, continuing until the earlier of the completion of the repurchase or January 6, 2023, depending upon market conditions.

 

The following table reflects the movements of treasury shares repurchased until March 31, 2022:

 

   Number of
restricted
stock units
 
As of December 31, 2021   605,316 
Repurchase   338,718 
Transferred – RSU’s program   (83,879)
As of March 31, 2022   860,155 

 

As of March 31, 2022, the Company has a total of 860,155 of treasury Class A common shares under the Repurchase Program with an average price of US$ 21.3.

 

17Earnings per share (EPS)

 

Basic

 

Basic EPS is calculated by dividing income 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.

 

F-27

 

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 income attributable to equity holders of the parent and the share data used in the basic and diluted EPS computations:

 

   Three-month period ended   Three-month period ended 
   March 31, 2022 (unaudited)   March 31, 2021 (unaudited) 
   Class A   Class B   Total   Class A   Class B   Total 
Income attributable to equity holders of the parent   52,517    50,142    102,659    6,174    5,637    11,811 
Weighted average number of common shares outstanding (thousand)   28,699    27,401    56,100    30,010    27,401    57,411 
Effects of dilution from:                              
Share-based compensation plan (thousands)   108    -         220    -      
                               
Basic loss per share - R$   1.83    1.83         0.21    0.21      
Diluted loss per share - R$   1.82    1.83         0.20    0.21      

 

Diluted income 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 revenue is as follows:

 

  

March

31, 2022

  

March

31, 2021

 
   (unaudited)   (unaudited) 
Educational content   423,223    330,840 
Other   7,931    1,648 
Deductions:          
Taxes   (1,117)   (816)
           
Revenue   430,037    331,672 

 

   March 31, 2022   March 31, 2021 
   (unaudited)   (unaudited) 
Segments  Core   Supplemental   Total   Core   Supplemental   Total 
Type of goods or service                        
Educational content   344,562    77,544    422,106    263,458    66,566    330,024 
Other   1,596    6,335    7,931    1,120    528    1,648 
Total net revenue from contracts with customers   346,158    83,879    430,037    264,578    67,094    331,672 

 

F-28

 

The Company recognized impairment expenses on trade receivables arising from contracts with customers, included under selling expenses in the statement of income, a reversal of R$ 6,231 and a loss of R$ 3,889 for the three-month periods ended March 31, 2022 and 2021, respectively.

 

Revenue Indirect tax benefits

 

According to Brazilian tax laws, the Company is subject to the taxation, with a zero-tax rate, of the social integration program tax (Programa de Integração Social, or PIS) and the social contribution on revenues tax (Contribuição para o Financiamento da Seguridade Social, or COFINS) on the sale of books. The sale of printed and digital books is also exempt from the Brazilian municipal taxes and from the Brazilian value added tax (Imposto sobre Operações relativas à Circulação de Mercadorias e sobre Prestações de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação, or ICMS).

 

F-29

19Expenses by nature

 

  

March

31, 2022

  

March

31, 2021

 
    (unaudited)    (unaudited) 
Content providing   (51,551)   (46,628)
Operations personnel   (16,307)   (9,326)
Inventory reserves   (2,399)   (2,224)
Freight   (14,099)   (8,004)
Depreciation and amortization   (25,957)   (16,435)
Other   (6,265)   (4,508)
Cost of sales   (116,578)   (87,125)
           
Sales personnel   (68,675)   (57,072)
Depreciation and amortization   (26,413)   (25,454)
Sales & marketing   (12,485)   (5,101)
Customer support   (57,719)   (22,077)
Allowance for expected credit losses   6,231    (3,889)
Real estate rentals   (147)   (379)
Other   (5,145)   (5,686)
Selling expenses   (164,353)   (119,658)
           
Corporate personnel   (32,123)   (27,162)
Third party services   (16,400)   (19,861)
Real estate rents   (460)   (907)
Travel expenses   (1,236)   (116)
Tax expenses   (1,276)   (1,778)
Software licenses   (2,055)   (1,987)
Share-based compensation plan   (15,423)   (11,724)
Depreciation and amortization   (13,411)   (6,163)
Other   (3,716)   (4,608)
General and administrative expenses   (86,100)   (74,306)
           
Total   (367,031)   (281,089)

 

The increase in expenses for the three-month period ended March 31, 2022, compared to the previous year, is mainly due to inclusion of the companies acquired in 2021.

 

F-30

 

20Finance result

 

  

March

31,2022

  

March

31,2021

 
    (unaudited)    (unaudited) 
Income from financial investments   22,739    4,867 
Changes in fair value of financial investments (a)   -    13 
Changes in fair value of financial derivatives (b)   23,082    - 
Changes in accounts payable to selling shareholders   -    2,418 
Foreign exchange gains   111,685    976 
Interest income – Others   795    1,191 
Other   932    475 
Finance income   159,233    9,940 
           
Changes in fair value of financial derivatives (b)   (11,429)   - 
Changes in accounts payable to selling shareholders (Note 14)   (7,028)   (230)
Bank fees   (2,680)   (2,006)
Foreign exchange loss   (6,379)   (1,255)
Interest on liabilities related to acquisition of investments (c)   (43,930)   (27,381)
Interest on lease liabilities   (1,161)   (1,019)
Interest on loans and financing   (48,770)   (3,689)
Other   (3,724)   (3,034)
Finance costs   (125,101)   (38,614)
           
Finance result   34,132    (28,674)

 

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

 

(b)Amount related to changes in the fair value of the put option to convert senior notes and change in the fair value of swap derivatives. See Note 23 for further information.

 

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

 

F-31

 

21Income taxes

 

(a)Reconciliation of income taxes expense

 

  

March

31, 2022

  

March

31, 2021

 
    (unaudited)    (unaudited) 
Profit before income taxes   108,890    22,411 
Combined statutory income taxes rate - % (a)   34%   34%
           
Income tax benefit (expense) at statutory rates   (37,023)   (7,620)
           
Reconciliation adjustments:          
   Share of loss of equity-accounted investees (b)   (1,918)   (348)
   Effect of presumed profit of subsidiaries (c)   -    492 
   Permanent differences (d)   (1,728)   (2,391)
   Stock option (e)   (886)   (338)
   Exchange variation on loans and financing (f)   33,542    - 
   Other (additions) exclusions, net   1,782    (395)
    (6,231)   (10,600)
           
Current   (21,847)   (17,353)
Deferred   15,616    6,753 
Income taxes benefit (expense)   (6,231)   (10,600)
           
Effective rate   6%   47%

 

(a)Considering that Arco Platform Ltd. is domiciled in Cayman and there is no income tax in that jurisdiction, the combined tax rate of 34% demonstrated above is the current rate applied to Arco Brasil S.A. which is the holding company of all operating entities of Arco Platform, in Brazil.

 

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

 

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

 

(d)Permanent differences of non-deductible expenses.

 

(e)Related to the effect of 34% of Geekie’s share-based compensation plan expenses.

 

(f)Refers to the effect of 34% of the convertible senior note foreign exchange gains in Arco Platform, not taxable.

 

F-32

 

(b)Deferred income taxes

 

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

 

   As of
December 
31, 2021
   Recognized
in profit or
loss
  

As of
March

31, 2021

 
              (unaudited) 
Deferred tax assets               
Tax losses carryforward   104,329    4,375    108,704 
                
Financial instruments from acquisition of interests   174,591    10,157    184,748 
Other temporary differences   64,869    8,244    73,113 
Share base compensation   10,377    1,786    12,163 
Tax benefit from tax deductible goodwill   8,032    (836)   7,196 
Amortization of intangible assets   22,161    1,885    24,046 
Total deferred tax assets   384,359    25,611    409,970 
Deferred tax liabilities               
Financial instruments – put options on equity method investments   (9,231)   -    (9,231)
Tax benefit from tax deductible goodwill   (53,897)   (9,998)   (63,895)
Other temporary differences   (8)   3    (5)
Total deferred tax liabilities   (63,136)   (9,995)   (73,131)
Deferred tax assets (liabilities), net   321,223    15,616    336,839 
                
Deferred tax assets   321,223         336,839 
Deferred tax liabilities   -         - 

 

22Segment information

 

Segment information is presented consistently with the internal reports provided to the Company’s chief executive officer, who is the chief operating decision maker for the purposes of assessing performance and allocating resources to the reportable segments, and making the Company’s strategic decisions.

 

The Company’s reportable segments are:

 

(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 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, a platform of questions to students and teachers, a Learning Management System (LMS) platform, an educational as a benefit platform and content to develop socio-emotional skills are also offered.

 

F-33

 

The chief operating decision maker does not make strategic decisions or evaluate performance based on geographic regions. Also, based on the agreements signed with schools as of March 31, 2022, none of the Company’s customers individually represented more than 5% of our total revenue.

 

   Three-month period ended March 31, 2022 (unaudited) 
   Core   Supplemental   Total
reportable
segments
   Adjustments
and
eliminations
   Total 
Net revenue   346,158    86,829    432,987    (2,950)   430,037 
Cost of sales   (92,943)   (25,119)   (118,062)   1,484    (116,578)
Gross profit   253,215    61,710    314,925    (1,466)   313,459 
Selling expenses   (136,404)   (27,949)   (164,353)   -    (164,353)
Segment profit   116,811    33,761    150,572    (1,466)   149,106 
General and administrative expenses   -    -    -    -    (86,100)
Other income, net   -    -    -    -    17,394 
Operating profit   -    -    -    -    80,400 
Finance income   -    -    -    -    159,233 
Finance costs   -    -    -    -    (125,101)
Share of loss of equity-accounted investees   -    -    -    -    (5,642)
Profit before income taxes   -    -    -    -    108,890 
Income taxes expense   -    -    -    -    (6,231)
Profit for the period   -    -    -    -    102,659 
                          
Other disclosures                         
Depreciation and amortization   61,505    4,276    65,781    -    65,781 
Investments in associates and joint ventures   137,655    -    137,655    -    137,655 
Capital expenditures   45,459    7,515    52,974    (490)   52,484 

 

F-34

 

   Three-month period ended March 31, 2021 (unaudited) 
   Core   Supplemental   Total reportable
segments
 
Net revenue   264,578    67,094    331,672 
Cost of sales   (71,870)   (15,255)   (87,125)
Gross profit   192,708    51,839    244,547 
Selling expenses   (99,753)   (19,905)   (119,658)
Segment profit   92,955    31,934    124,889 
General and administrative expenses   -    -    (74,306)
Other income, net   -    -    1,525 
Operating profit   -    -    52,108 
Finance income   -    -    9,940 
Finance costs   -    -    (38,614)
Share of loss of equity-accounted investees   -    -    (1,023)
Profit before income taxes   -    -    22,411 
Income taxes expense   -    -    (10,600)
Profit for the period   -    -    11,811 
                
Other disclosures               
Depreciation and amortization   44,578    3,474    48,052 
Investments in associates and joint ventures   33,638    -    33,638 
Capital expenditures   33,626    2,073    35,699 

 

F-35

 

 

Capital expenditures consist of additions to property and equipment and intangible assets. There were no inter-segment revenues or costs in the three-month period ended March 31, 2021.

 

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

 

Adjustments and eliminations refer to transactions due between companies in the Core and Supplemental segments, such as: loans, accounts payable, accounts receivable, sales and cost of sales. Segment assets and liabilities are measured on the same basis 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, 2022 (unaudited)                         
Total assets   5,589,971    406,829    5,996,800    (9,320)   5,987,480 
Total liabilities   3,954,856    95,184    4,050,040    (9,320)   4,040,720 
December 31, 2021                         
Total assets   5,637,667    378,520    6,016,187    (26,068)   5,990,119 
Total liabilities   4,048,511    92,442    4,140,953    (26,068)   4,114,885 

 

23Financial instruments

 

The Company holds the following financial instruments:

 

 

Financial assets

 

Assets at

FVTPL

   Assets at amortized cost   Total 
March 31, 2022 (unaudited)               
Cash and cash equivalents   -    209,304    209,304 
Financial investments   -    775,911    775,911 
Trade receivables   -    806,201    806,201 
Related parties   -    11,622    11,622 
Investments in financial instruments (Bewater)   9,814    -    9,814 
Other assets (Instituto Arco)   -    1,794    1,794 
    9,814    1,804,832    1,814,646 

 

Financial assets 

Assets at

FVTPL

   Assets at amortized cost   Total 
December 31, 2021               
Cash and cash equivalents   -    211,143    211,143 
Financial investments   -    1,014,056    1,014,056 
Trade receivables   -    593,263    593,263 
Derivative financial assets   861    -    861 
Related parties   -    11,390    11,390 
Investments and interests in other entities   9,803    -    9,803 
Other assets (Instituto Arco)   -    1,373    1,373 
    10,664    1,831,225    1,841,889 

 

F-36

 

 

Financial liabilities

  Liabilities at FVTPL   Liabilities at amortized cost   Total 
March 31, 2022 (unaudited)               
Trade payables   -    132,747    132,747 
Derivative financial liabilities   210,760    -    210,760 
Accounts payable to selling shareholders   887,929    829,459    1,717,388 
Leases liabilities   -    37,262    37,262 
Loans and financing   -    1,551,612    1,551,612 
    1,098,689    2,551,080    3,649,769 

 

 

Financial liabilities

  Liabilities at FVTPL   Liabilities at amortized cost   Total 
December 31, 2021               
Trade payables   -    103,292    103,292 
Derivative financial liabilities   223,561    -    223,561 
Accounts payable to selling shareholders (a)   867,264    801,522    1,668,786 
Leases liabilities   -    43,118    43,118 
Loans and financing   -    1,831,327    1,831,327 
    1,090,825    2,779,259    3,870,084 

 

  (a)The Company measures at fair value through profit or loss the contingent consideration arising from business combinations in accordance with IFRS 3.

 

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.

 

Financial instruments at fair value through profit or loss

 

Derivative assets and liabilities

 

The Company maintains put options from investments and swap derivatives to protect its exposure to foreign currency risk, specifically for loans contracts. These derivatives are measured at fair value and are presented as financial assets when the fair value results in a gain, and as financial liabilities when the fair value results in a loss. Any gains or losses from these derivatives are recognized directly in the income statement.

 

As of March 31, 2022 and December 31, 2021, none of the Company’s derivatives has been designated as hedges for accounting purposes.

 

Amounts recognized in profit or loss

 

Changes in fair values of financial instruments at fair value through profit or loss are recorded in finance income (expenses) in profit or loss. For the three-month period ended March 31, 2022, the Company recognized a net financial income of R$ 11,653.

 

F-37

 

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,

2022

  

December

31, 2021

 
       (unaudited)      
Financial assets             
Derivative financial instruments  Level 2   -    861 
Investments at fair value  Level 1   9,814    9,803 
              
Financial liabilities             
Derivative financial liabilities  Level 2   10,281    - 
Derivative financial liabilities  Level 3   200,479    223,561 
Accounts payable to selling shareholders  Level 3   887,929    867,264 

 

As of March 31, 2022, and December 31, 2021, 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 the resulting fair value estimates are included in levels 1 and 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.

 

F-38

 

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, 2022 and 2021.

 

Recurring fair value measurements  Financial instruments liabilities  

Accounts payable

to selling shareholders

 
As of December 31, 2020   -    (861,385)
Acquisitions   -    (23,520)
Payment   -    22,646 
Changes in accounts payable to selling shareholders   -    2,188 
Interest expense   -    (23,075)
Other   -    4,000 
As of March 31, 2021 (unaudited)   -    (879,146)
           
As of December 31, 2021   (223,561)   (867,264)
Changes in accounts payable to selling shareholders   -    (7,028)
Changes in derivative instruments fair value   23,082    - 
Interest expense   -    (13,637)
As of March 31, 2022 (unaudited)   (200,479)   (887,929)

 

(iv) Transfers between levels 2 and 3

 

During the three-month periods ended March 31, 2022 and 2021, 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 uses specialists to measure fair value of certain financial assets independently.

 

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

 

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

 

F-39

 

24Commitments 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, 2020   465    52    849    1,366 
Additions   262    720    274    1,256 
Business combination   -    4    -    4 
Reversals   (393)   (479)   (356)   (1,228)
Balance at December 31, 2021   334    297    767    1,398 
Additions   77    -    19    96 
Reversals   -    (220)   -    (220)
Balances at March 31, 2022 (unaudited)   411    77    786    1,274 

 

As of March 31, 2022, the Company was party to lawsuits classified as possible losses totaling R$ 10,336 (R$ 9,004 as of December 31, 2021), as shown below:

 

  

March 31,

2022

  

December 31,

2021

 
   (unaudited)     
Civil (a)   7,083    7,032 
Labor (b)   3,253    1,972 
Total   10,336    9,004 

 

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

 

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

 

On September 19, 2019, Mr. Ulisses Borges Cardinot, the non-controlling shareholder in our subsidiary, International School, filed a request for arbitration with the Center for Arbitration and Mediation of the Chamber of Commerce Brazil-Canada in Brazil against Arco Platform Limited, Companhia Brasileira de Educação e Sistemas de Ensino S.A. and Arco Educação S.A. This request for arbitration purporting to assert the non-controlling shareholder’s rights related to both the form of payment (shares) and the calculation of the purchase price under the Investment Agreement is still ongoing.

 

On November 29, 2021, the arbitration panel issued a partial award on the merits of the arbitration. The decision is under the ongoing review of financial and legal advisors of the Company and its amount calculated will be further discussed in the award liquidation phase of the arbitration proceeding. However, the arbitration panel decided that (i) Arco Platform Ltd. and Arco Educação S.A. are not subject to the terms of the Investment Agreement, therefore, shall not be part of the arbitration proceeding; (ii) Mr. Cardinot will not be entitled to receive shares of Arco Platform; and (iii) the amount due by Companhia Brasileira de Educação e Sistemas de Ensino S.A. shall be calculated based on the 10 times realized EBITDA for the school years of 2019 (first installment) and 2020 (second installment), both net of net debt, as determined in the investment agreement, consistent with the calculation methodology to estimate the provisioned amount in our balance sheet as reported.

 

F-40

 

In light of the arbitration proceeding and based on IAS 37, the Company understands that the circumstances, risks and uncertainties of the arbitration must be taken into consideration in order to reach the best estimate of the liability. Contingencies should be reevaluated at each balance sheet date and adjusted to reflect the best current estimate.

 

Based on the arbitration panel decision mentioned above, the Company has recorded the provision of the amount considered the amount due for the purchase price under the Investment Agreement payable to the non-controlling shareholder. The liability is calculated based on the realized EBITDA for the school years of 2019 (first installment) and 2020 (second installment), both, net of net debt, as determined in the agreement. The school year is defined as the twelve-month period starting in October of the previous year to September of the mentioned current year. The first and second installments will be paid in the due course of the arbitration. During the three-month period ended March 31, 2022, the Company recognized R$ 8,823 of interest expense based on the Sistema Especial de Liquidação e Custódia - SELIC rate. The use of the SELIC rate and the amount of interest to be paid are assumptions by the Company. These assumptions may differ from the actual rate of interest, the amount of interest that will be paid, as well as which party will be responsible for its payment, since they will be determined by the arbitration panel. 

 

25Transactions not involving cash

 

The Company carried out the non-cash activities in the three-month period ended March 31, 2022, which are not reflected in the statement of cash flows, mainly related to the effects of lease contracts signed in the period and acquisition of trademarks Mentes do Amanhã and PGS as described in Notes 10 and 11, respectively.

 

26Subsequent events

 

Shares repurchase

 

From April 1st, 2022, until May 24, 2022, the Company purchased an aggregate amount of 145,597 Class A common shares for a total of approximately US$ 2,653 thousand. This repurchase was made in accordance with the Repurchase Program mentioned in Note 16.

 

Corporate restructuring

 

On May 1, 2022, the Company completed a corporate reorganization through the incorporation of P2D Educação Ltda. by Companhia Brasileira de Educação de Sistemas de Ensino S.A.

 

***

 

F-41