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Filed Pursuant to Rule 424(b)1
Registration No. 333-239686

 

PROSPECTUS

18,575,492 Class A Common Shares

 

 

LOGO

Vasta Platform Limited

(incorporated in the Cayman Islands)

 

 

This is an initial public offering of the Class A common shares, US$0.00005 par value per share of Vasta Platform Limited, or Vasta. Vasta is offering 18,575,492 of the Class A common shares to be sold in this offering.

Prior to this offering, there has been no public market for our Class A common shares. The initial public offering price per Class A common share is US$19.00. Our Class A common shares have been approved for listing on the Nasdaq Global Select Market, or Nasdaq, under the symbol “VSTA.”

Following this offering, our existing shareholder, Cogna Educação S.A., or Cogna, will beneficially own 77.6% of our outstanding share capital, assuming no exercise of the underwriters’ option to purchase additional shares referred to below. The shares held by Cogna are Class B common shares, which carry rights that are identical to the Class A common shares being sold in this offering, except that (1) holders of Class B common shares are entitled to 10 votes per share, whereas holders of our Class A common shares are entitled to one vote per share, (2) Class B common shares have certain conversion rights and (3) holders of Class B common shares are entitled to preemptive rights in the event that additional Class A common shares are issued in order to maintain their proportional ownership interest. For further information, see “Description of Share Capital.” As a result, Cogna will control approximately 97.2% of the voting power of our outstanding share capital and 77.6% of our total equity ownership following this offering, assuming no exercise of the underwriters’ option to purchase additional shares.

 

 

We are an “emerging growth company” under the U.S. federal securities laws as that term is used in the Jumpstart Our Business Startups Act of 2012 and will be subject to reduced public company reporting requirements for as long as we remain an emerging growth company. In addition, following the offering, we will be a “controlled company” within the meaning of the Nasdaq corporate governance standards and as such plan to rely on available exemptions from certain Nasdaq corporate governance requirements. Investing in our Class A common shares involves risks. See “Risk Factors” beginning on page 33 of this prospectus.

 

     Per
Class A
common
share
     Total  

Initial public offering price

   US$ 19.00      US$ 352,934,348  

Underwriting discounts and commissions

   US$ 1.04      US$ 19,411,389  

Proceeds, before expenses, to us(1)(2)

   US$ 17.96      US$ 333,522,959  

 

(1)

See “Underwriting” for a description of all compensation payable to the underwriters.

(2)

Assumes no exercise of the underwriters’ option to purchase additional Class A common shares.

We have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase up to 2,786,323 additional Class A common shares at the initial public offering price, less underwriting discounts and commissions.

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

The underwriters expect to deliver the Class A common shares against payment in New York, New York on or about August 4, 2020.

 

 

Global Coordinators

 

Goldman Sachs & Co. LLC       BofA Securities   Morgan Stanley    Itaú BBA

Joint Bookrunners

 

UBS Investment Bank   Bradesco BBI

 

 

The date of this prospectus is July 30, 2020.


Table of Contents

LOGO


Table of Contents

TABLE OF CONTENTS

 

 

 

     Page  

Business

     164  

Regulation

     203  

Management

     207  

Principal Shareholder

     212  

Related Party Transactions

     214  

Description of Share Capital

     218  

Class A Common Shares Eligible for Future Sale

     236  

Taxation

     238  

Underwriting

     242  

Expenses of The Offering

     255  

Legal Matters

     256  

Experts

     256  

Enforceability of Civil Liabilities

     258  

Where You Can Find More Information

     260  

Explanatory Note to the Financial Statements

     261  

Index to Financial Statements

     F-1  
 

 

 

We have not authorized anyone to provide any information or make any representation about this offering that is different from, or in addition to, that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we may have referred you. We and the underwriters take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We, the underwriters and any of our or their affiliates have not authorized any other person to provide you with different or additional information. Neither we, the underwriters nor any of our or their affiliates are making an offer to sell, or seeking an offer to buy, the Class A common shares in any jurisdiction where the offer or sale is not permitted.

This prospectus is being used in connection with the offering of the Class A common shares in the United States and, to the extent described below, elsewhere. This offering is being made in the United States and elsewhere solely based on the information contained in this prospectus. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of the Class A common shares. Our business, financial condition, results of operations and prospects may have changed since the date on the front cover of this prospectus.

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

Notice to EEA Investors. In any European Economic Area, or EEA, Member State that has implemented the Prospectus Regulation, this communication is only addressed to and is only directed at qualified investors in that Member State within the meaning of the Prospectus Regulation.

 

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This prospectus has been prepared on the basis that any offer of our Class A common shares in any Member State of the EEA (each, a “Relevant Member State”), will be made pursuant to an exemption under the Prospectus Regulation from the requirement to publish a prospectus for offers of shares. Accordingly, any person making or intending to make any offer within the EEA of our Class A common shares which are the subject of this offering may only do so in circumstances in which no obligation arises for us or any of the underwriters to publish a prospectus pursuant to Article 3 of the Prospectus Regulation in relation to such offer. Neither we nor the underwriters have authorized, nor do they authorize, the making of any offer of our Class A common shares in circumstances in which an obligation arises for us or the underwriters to publish a prospectus for such offer.

For the purposes of this provision, the expression “Prospectus Regulation” means Regulation (EU) 2017/1129 and includes any relevant implementing measure in each Relevant Member State.

Notice to UK Investors. In the United Kingdom, this prospectus is only addressed to and directed at qualified investors who are (1) investment professionals falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”); or (2) high net worth entities and other persons to whom it may lawfully be communicated, falling within Article 49(2)(a) to (d) of the Order (all such persons together being referred to as “relevant persons”). Any investment or investment activity to which this prospectus relates is available only to relevant persons and will only be engaged with relevant persons. Any person who is not a relevant person should not act or rely on this prospectus or any of its contents.

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

 

 

Unless otherwise indicated or the context otherwise requires, as used in this prospectus, (i) the terms “we,” “our,” “us,” “Vasta” or the “Company,” when used in the context of (a) the period up to October 11, 2018, the date of the acquisition by Saber Serviços Educacionais S.A., or Saber, a subsidiary of Cogna (formerly known as Kroton Educacional S.A., and together with its subsidiaries, the Cogna Group) of Somos Educação S.A., or Somos, and together with its subsidiaries, the Somos Group, which we refer to herein as the “Acquisition,” refer to the Combined Carve-out K-12 curriculum businesses held by each of Somos (which we refer to as “Somos – Anglo”) and the Cave-out K-12 curriculum business already held by Cogna, known as “Pitágoras” (and together with Somos – Anglo, which we refer to as the “Predecessors”); and (b) the period after the Acquisition, refer to the Predecessors’ Combined Carve-out K-12 curriculum business under the Vasta brand (which we refer to in this prospectus alternatively as “Vasta” or the “Successor”); and (ii) the term “issuer” refers to Vasta exclusive of its subsidiaries.

Due to the change in the basis of accounting resulting from the acquisition by Cogna of the K-12 curriculum businesses held by the Somos Group, and because the K-12 business held by Cogna (Predecessor – Pitágoras) came into common control with such K-12 curriculum business previously held by the Somos Group only upon completion of the Acquisition, we are required to present separately (1) the financial information for the period beginning on October 11, 2018, and through and including December 31, 2019, which we refer to as the “Post-Acquisition Period,” and (2) the financial information for the periods prior to, and including, October 10, 2018, which we refer to as the “Pre-Acquisition Period.” Certain financial information of the Post-Acquisition Period is not comparable to that of the Pre-Acquisition Period. For a discussion of our Post-Acquisition and Pre-Acquisition Periods, see “Presentation of Financial and Other Information—Financial Statements.”

The term “Brazil” refers to the Federative Republic of Brazil and the phrase “Brazilian government” refers to the federal government of Brazil. “Central Bank” refers to the Brazilian Central Bank (Banco Central do Brasil). References in the prospectus to “real,” “reais” or “R$” refer to the Brazilian real, the official currency of Brazil and references to “U.S. dollar,” “U.S. dollars” or “US$” refer to U.S. dollars, the official currency of the United States.

 

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SUMMARY

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

Overview

We are a leading, high-growth education company in Brazil powered by technology, providing end-to-end educational and digital solutions that cater to all needs of private schools operating in the K-12 educational segment, ultimately benefiting all of our stakeholders, including students, parents, educators, administrators and private school owners.

We have built a “Platform as a Service,” or PaaS, with two main modules. Our Content & EdTech Platform combines a multi-brand and tech-enabled array of high-quality core and complementary education solutions with digital and printed content through long-term contracts with partner schools. We characterize revenue associated with these arrangements as subscription revenue given the renewable and predictable nature of the revenue associated with these contracts. Our emerging Digital Platform will unify our partner schools’ entire administrative ecosystem, enabling them to aggregate multiple learning strategies, helping them to focus on education, and promoting client and revenue growth to allow them to become more profitable institutions.

We believe our experience, high-quality education system and life-long learning solutions have helped us establish market-leading brands that are well-known both locally and nationally. This expertise has enabled continuous growth within the private K-12 market through long-term relationships and we believe it will be translated into a LTV/CAC ratio (as defined below) for the solutions that we characterize as subscription arrangements equal to 6.4x based on 2020 sales cycle (from October 1, 2019 to September 30, 2020). This is an important metric as it compares the estimated value of the customer relationship over its lifetime, Lifetime Value or LTV (measured as a function of the gross margin we expect to derive from the additional Annual Contract Value Bookings, or ACV Bookings, related to the contracts with our customers, divided by Weighted Average Cost of Capital, or WACC, plus the customer churn rate, which is the expected turnover rate), divided by the cost of acquiring the customer, Customer Acquisition Cost, or CAC (which consists of sales and marketing costs for the revenue for the solutions we characterize as subscription arrangements). We consider only subscription arrangements in our calculation of our LTV/CAC ratio because such arrangements have recurring, generally predictable revenue, while the revenue that is not based on subscription arrangements may be non-recurring and less predictable in nature. We believe the LTV/CAC ratio is an important metric for measuring how our sales efforts and costs related to acquiring subscription-based customers will provide value to us over time.

As of March 31, 2020, our network of business-to-business, or B2B, customers consisted of 4,167 partner schools. As of December 31, 2019, our network of B2B customers consisted of 3,400 partner schools, compared to 2,945 schools as of December 31, 2018, and 2,581 schools as of December 31, 2017, representing annual growth rates of 15.4% and 14.1%, respectively. As of March 31, 2020, we had 1,311 thousand enrolled students, defined as students contracted through our partner schools, using our platform in Brazil. As of December 31, 2019, we had 1,186 thousand enrolled students compared to 1,011 thousand enrolled students as of December 31, in 2018 and 891 thousand as of December 31, 2017, representing annual growth rates of 17.3% and 13.5%, respectively.

Our revenue derived from the solutions we characterize as subscription arrangements is driven by the number of enrolled students in each partner school that adopts our solutions. The net revenue from sales and



 

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services for the solutions we characterize as subscription arrangements represented 67.7% of the total net revenue from sales and services of the Successor in the three months ended March 31, 2020, 67.2% of the total net revenue from sales and services of the Successor in the year ended December 31, 2019, 65.4% of the sum of the total net revenue from sales and services of the Successor and Predecessors in 2018 and 58.7% of the sum of the total net revenue from sales and services of the Predecessors in 2017.

Revenue from solutions other than the ones we characterize as subscription arrangements includes stand-alone textbook sales, university admission preparatory exam courses and sales from our Livro Fácil business, an e-commerce for the sale of educational content (textbooks, school materials, stationery, among others) directly to schools, parents and students. Net revenue from sales and services deriving from these solutions represented 32.4% of the total net revenue from sales and services of the Successor for the three months ended March 31, 2020, 32.8% of the total net revenue from sales and services of the Successor in the year ended December 31, 2019, 34.5% of the sum of the total net revenue from sales and services of the Successor and Predecessors in 2018 and 41.3% of the sum of the total net revenue from sales and services of the Predecessors in 2017.

Our Mission

Our mission is to help private K-12 schools to be better and more profitable, supporting their digital transformation. We believe we are uniquely positioned to help schools in Brazil undergo the process of digital transformation and bring their education skill-set to the 21st century. We promote the unified use of technology in K-12 education with enhanced data and actionable insight for educators, increased collaboration among support staff and improvements in production, efficiency and quality.

We provide the following solutions for the empowerment of our stakeholders:

For students

Our pedagogical approach and educational solutions are designed to equip students with abilities that go beyond learning core and complementary knowledge. We encourage them to think critically and creatively, solve complex problems, make evidence-based decisions, and work collaboratively at their own individualized pace.

For parents

Through our solutions, parents can access real-time student performance data and have a direct communication channel with educators and optimize parents’ time by addressing all of their children’s developmental needs, including core education and complementary activities through a single location—the school.

For educators

We help educators discover the pedagogical approach best suited to an individual student through immediate access to student data, which generates insight and analytics on student progress in order to target growth areas and develop teaching plans aimed at delivering personalized learning.

For private school owners and administrators

We are working on expanding our digital administrative platform to allow private school owners and administrators to maximize time, access a broader set of information more intelligently, develop new action plans, promote leadership and motivate their teams. As a result, this will allow private school owners to better manage their schools, focusing on improving educational content, solutions and services, while enhancing the school’s reputation and growing revenue.



 

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For society

As part of our social responsibility initiatives, we seek to make education available to all segments of society. We share many of the best practices in education that we acquire through our experience in the private K-12 with public schools and teachers in Brazil for free.

We believe that our reputation, excellent track record in education, brand awareness, personalization, flexibility, customer service, academic outcomes and innovation are attributes valued by all of our stakeholders. We believe we are the only player in the market to integrate a wide array of content formats from different brands in a unified, technology-powered platform that allows for the continuous tracking of their academic performance during the whole education cycle.

In addition, we aim at adopting a neuroscience-first approach in evolving our understanding of what directly impacts teaching and learning, which includes acquiring new knowledge and nurturing attention, concentration, memory and motivation.

Our Results

Financial and Operating Information

We believe our business model includes highly predictable, contracted revenue and a unique product offering. The following is a brief summary of our principal results of operations and financial condition for the first quarter of 2020 and the most recently completed fiscal year.

 

   

Our total net revenue from sales and services amounted to R$392.4 million and R$353.1 million for the three months ended March 31, 2020 and 2019, respectively, and R$989.7 million for the year ended December 31, 2019;

 

   

Net revenue derived from the solutions we characterize as subscription arrangements represented 67.7% and 65.0% of our total net revenue from sales and services for the three months ended March 31, 2020 and 2019, respectively, and 67.2% for the year ended December 31, 2019;

 

   

Our net profit amounted to R$27.6 million and R$14.9 million for the three months ended March 31, 2020 and 2019, respectively, and our net loss amounted to R$60.7 million for the year ended December 31, 2019;

 

   

Our Adjusted EBITDA amounted to R$121.5 million and R$105.7 million for the three months ended March 31, 2020 and 2019, respectively, and R$254.0 million for the year ended December 31, 2019 (see Presentation of Financial and Other Information—Special Note Regarding Non-GAAP Financial Measures—Adjusted EBITDA, Free Cash Flow and Adjusted Cash Conversion Ratio);

 

   

As of March 31, 2020, we had total outstanding bonds and financing of R$1,647.0 million, mostly comprised of private debentures issued by Somos Sistemas to Saber and Cogna (as creditors) at annual interest rate of the Interbank Deposit Certificate (Certificado de Depósito Interbancário), or CDI, plus 1.15%, with semi-annual coupon payments and a bullet repayment at maturity in August 2023.

Please see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for a more detailed discussion of our results of operations and financial condition.

Our level of indebtedness may require that we use a substantial portion of our cash flows to service our debt, which will reduce funds available for working capital, capital expenditures and other corporate purposes, and which may limit our ability to operate our business. In addition, the terms of the debentures and our other indebtedness contain covenants that may restrict our ability to operate our business. The terms of the debentures that we owe to



 

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our parent require that (1) we will allocate at least 50% of the use of proceeds from any liquidity event (including the proceeds from this offering) to repay such debentures; (2) we will not obtain any new loans unless the proceeds of any such loan are directed to repay our debentures with Cogna; and (3) we will not pledge shares and/or dividends. We expect to use two-thirds of the net proceeds from this offering to repay these debentures. See “Use of Proceeds.” See also “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness” for a summary of the covenants of our indebtedness.

Our Addressable Market and Opportunity for Growth

According to a report by Oliver Wyman that was commissioned by us, the total addressable market, or TAM, for our Content & EdTech Platform and Digital Platform for private schools in Brazil was R$25.3 billion as of 2018 and segregated between: (1) R$6.0 billion for core content; (2) R$6.4 billion for complementary education solutions; and (3) R$12.9 billion for digital platform. Oliver Wyman expects that our TAM will more than double by 2030, reaching R$54.0 billion, segregated between: (1) R$13.4 billion for core content; (2) R$14.0 billion for complementary education solutions; and (3) R$26.6 billion for digital platform. As of 2018, we estimate we captured approximately 12.1% of the TAM for core content and 0.4% of the TAM for complementary education solutions (which is included in our Content & EdTech Platform segment) and 0.5% of the TAM for our Digital Platform segment, which we believe represents significant growth opportunity.

With 48.5 million students enrolled in private and public schools in 2018 according to Censo Escolar 2018, Brazil’s K-12 education segment is significantly larger in relative terms compared to other world markets; Brazil’s K-12 students account for 23% of the total population, while in the United States this representation falls behind at 17% (considering an estimate of 56.6 million students attending school in fall 2019), according to the National Center for Education Statistics, or NCES. The Brazilian private K-12 market is also large and, despite being larger than the U.S. market in relative size, there is a strong potential to increase the penetration of private K-12 education in Brazil when compared to China, Indonesia and India, for instance, as presented in the graph below. Private K-12 education is very valued by Brazilian families given the quality gap between private and public K-12 schools, as discussed in more detail in the “Industry” section.

 

 

LOGO

 

(1)

Including Hong Kong and Macao.

Source: BMI, INEP and UNESCO

We believe our opportunities to capture market growth will continue to expand as we incorporate new solutions into our existing platform, including, for example, by expanding our offering of STEAM-based content



 

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(science, technology, engineering, arts and math) and by increasing our offerings within our Digital Platform, to include academic and financial ERP and student acquisition solutions, including online enrollment platform, digital marketing and scholarship marketplace.

Private K-12 Industry Market Trends

We believe that our addressable market is characterized by the following trends:

Digital transformation is reshaping private K-12 industry

Technology has enabled improvements in core content, complementary education and digital platform solutions. The internet and digital technology are changing the way people learn, expanding beyond the classroom, increasing learning through gamification, immersion and virtual reality tools, and making the learning process adaptive and personalized. Moreover, technology has supported the development of management systems for schools to manage their costs and expenses and increase their efficiency and profitability.

Limited internal management and administrative solutions for schools

According to Censo Escolar 2018, there were approximately 40,000 private schools in Brazil as of December 2018, which are mainly small-scale units dedicating significant working hours to administrative activities, such as intake, retention, financial management and communication with parents, for which they are currently interacting with multiple and unintegrated providers. We believe there is strong demand for an integrated platform like ours that consolidates multiple school management services that allow for more actionable data reports, optimization of administrators’ time and increased efficiency in schools.

Need for modernized content distribution models

We believe the modern student is easily distracted, yet intellectually curious and demanding for high-quality, efficiently-delivered content. At the same time, schools and families are ready for the benefits available from the combined use of science and technology in education. This data-driven approach can aid in delivering superior and more responsive learning outcomes through products based on personalization and adaptive learning.

We believe we can lead the imminent transition of the underlying learning methods in Brazilian education, by offering assertive content in multiple formats alongside more effective high-impact learning techniques, with support from our constantly evolving neuro-pedagogical and science in learning approaches. Furthermore, integrated technological solutions customarily allow parents and educators to engage and track more closely student development.

New student skill set and importance of socio-emotional solutions

The increased labor market competitiveness and social demands in the 21st century require new skill sets, driving demand for a broader learning experience. Schools at the forefront of this movement teach socio-emotional learning and collaboration skills, foster individual participation, autonomy and critical thinking, and include new areas of broad student development such as STEAM-based curriculum and language instruction. We are uniquely positioned to capture this market with our English instruction and socio-emotional skills solutions, and plan to add even more solutions to our integrated platform.



 

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Our Products and Services

Our Ecosystem

We believe each school is unique. Understanding each school’s specific needs is crucial to providing differentiated solutions and services, thereby building and deepening long-standing relationships with our partner schools. We believe we are building the most complete and integrated platform of K-12 products and services to deliver end-to-end solutions that cater to each school’s entire ecosystem.

The chart below details the variety of products and services we currently provide through our Content & EdTech Platform and our Digital Platform along with other areas in which we plan to operate, establishing ourselves as a one-stop partner for private schools:

 

 

LOGO

In the three months ended March 31, 2020 and for the comparative period of 2019, total net revenue from sales and services from our Content & EdTech Platform and our Digital Platform accounted for 81.0% and 19.0%, respectively, of the net revenue from sales and services of the Successor.

In 2019, total net revenue from sales and services from our Content & EdTech Platform and our Digital Platform accounted for 89% and 11%, respectively, of the net revenue from sales and services of the Successor, compared to 92% and 8%, respectively for the sum of the total net revenue from sales and services of the Successor for the period from October 11 to December 31, 2018 and Predecessors for the period from January 1 to October 10, 2018 and 100% and 0%, respectively for the total net revenue from sales and services of the Predecessors in 2017.



 

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Content & EdTech Platform

Core Content (learning systems, textbooks and other services)

We provide core educational content for Brazilian primary and secondary education through a multi-brand, tech-enabled platform, with the flexibility and quality required to satisfy customer needs through a multitude of pedagogical approaches, made available primarily through a model that we characterize as subscription arrangements. In the three months ended March 31, 2020, total net revenue from sales and services from subscription arrangements accounted for 83.6% of net revenue from sales and services of our Content & EdTech Platform, compared to 80.1% in the comparative period of 2019. In 2019, total net revenue from sales and services derived from subscription arrangements accounted for 75.4% of net revenue from sales and services of our Content & EdTech Platform, compared to 71.1% in 2018 and 58.7% in 2017.

The core content solutions we characterize as subscription arrangements include traditional learning systems (with main brands including Anglo, pH, Maxi, Pitágoras, Ético and Rede Cristã de Educação) and PAR, our proprietary product designed as an educational platform based on textbooks. All of our solutions include digital and printed content covering all disciplines for students, educators’ orientation manuals, exercise books, books for the study of multidisciplinary subjects and workbooks, as well as other features such as continuous assessment, ongoing training for educators, pedagogical support, marketing support, education-related events and gatherings, proprietary and differentiated student assessment tools and digital learning tools, available digitally and non-digitally. We offer a large range of brands targeting a wide spectrum of schools and students of varying academic preferences, backgrounds and demographics, allowing us to maximize outreach, awareness, penetration and customer satisfaction. We also derive revenue from other sources, such as (1) one-off textbook sales, which despite not being part of our core strategy, can be an important first step to start a relationship with a school, which can eventually subscribe to PAR or one of our learning systems in the future; and (2) a preparatory course for university admissions exam, which acts as a reputation enhancer for our Anglo brand.

Sold as a bundle with our core content, we offer digital learning and continuous teacher training, as follows.

 

   

Digital Learning

Plurall and Plurall Maestro are one of the only mobile-friendly and fully-integrated digital platforms for students, educators, coordinators and administrators currently available in the Brazilian market. For students, Plurall allows interaction with educational content inside and outside the classroom, as well as the opportunity to ask questions online through a student discussion forum, access tutors and review mock exams from ENEM and Brazil’s main university entrance applications. For parents and guardians, Plurall provides summarized reports with individual performance and serves as a communication tool with the school. For educators, coordinators and administrators of private schools, Plurall Maestro also allows for the creation of individualized content and data generation and evaluation reports to support in-class enhancements.

 

   

Continuous Teacher Training

PROFS is our fully digital teacher training program, also offered as a bundle with our core content solutions and aimed at enhancing in-class work through mentoring so that teaching professionals can reflect on their practice and skill-set and continue to pursue excellence in performance.

Complementary education solutions

We offer diversified solutions, both as part of core curricula and as after-school content. The complementary education solutions we characterize as subscription arrangements include:

 

   

English Stars: an English educational platform designed to develop fluency in the English language with an emphasis on 21st century skills;



 

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O Líder em Mim: a program with content, methodology, teaching material and training to develop leadership and other socio-emotional skills;

 

   

Matific: In partnership with the international online learning company Matific, we provide engaging and entertaining mathematics instruction based on a strong pedagogical background and presented through playful interactions;

 

   

MindMakers: MindMakers uses children’s curiosity and energy as fuel to create rational minds with powerful computational thinking skills. MindMakers is designed to teach students how to develop leadership, collaboration and persistence through multidisciplinary problem-solving exercises; and

 

   

Plurall Olímpico: an academic platform of preparatory content for scientific competitions.

We are constantly looking to incorporate new solutions into our existing platform. We are currently working on expanding our complementary offerings to include STEAM-based curriculum.

Digital Platform

Our Digital Platform is being developed to cater to all other school needs aside from education, aiming at increasing efficiency and quality of service. It is also an excellent tool to reduce the churn of our partner schools, greatly improving user experience for school owners and families through the seamless integration of educational and administrative services. Currently, we offer Livro Fácil, an e-commerce for the sale of educational content for schools, which also functions as a hub for distribution materials from other suppliers that are chosen by our partner schools, reinforcing our partner of choice positioning. We plan to increase our portfolio of solutions offered through our Digital Platform, either by developing additional solutions in-house, through partnerships or through merger and acquisition opportunities, including academic and financial ERP and student acquisition solutions, such as online enrollment platform, digital marketing and scholarship marketplace. See “—Our Growth Strategy—Increase the quantity of products and services we offer.”

Our Competitive Strengths

True partner of choice for private K-12 schools in Brazil

We believe tradition, reputation, experience and innovation are imperative for success in K-12 education. We have been present in the lives of Brazilian students over the last five decades though our parent company, or Cogna. As of March 31, 2020, we served 6,939 schools in the K-12 private market, with almost 2.6 million enrolled students. We believe we are best positioned to cover all of our total addressable market as we cater to each private K-12 school’s unique profile and preferences. We believe our track record in Brazil is unique, as demonstrated by the following:

 

   

pioneer in education subscription arrangements;

 

   

large, well-recognized portfolio of private K-12 brands;

 

   

first to implement socio-emotional curricula in Brazil and first Brazilian educational platform with online tutoring for one-on-one personalized learning;

 

   

we believe we have one of the largest groups of educators, authors and tutors entirely dedicated to K-12 in Brazil and one of the largest databases of K-12 educational content in Brazilian Portuguese;

 

   

only company in Brazil to provide an educational platform based on textbooks (PAR) and supported by an e-commerce platform for the sale of educational content;

 

   

we believe we are at the forefront in integrating different content formats (text, video, audio, images, quizzes, among others) in a unified platform;



 

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we are pioneering the incorporation of neuroscience elements into our educational platform and emphasizing science in learning and promoting student success through personalized learning; and

 

   

we are developing our Digital platform to cater to the entire school ecosystem, delivering core and complementary content education, and promoting improved school management to promote efficiency gains.

By becoming the schools’ partner of choice through our end-to-end offering of core and complementary content and the ramp-up of the solutions we will offer through our Digital Platform, we expect to continue to significantly increase our TAM while increasing school retention. The following chart shows the size and potential growth in TAM from 2018 to 2030 for Core Content and Complementary Solutions, comprising our Content & EdTech Platform (area shaded in gray) and for school administrative and management solutions, which will be served by our Digital Platform (area shaded in pink).

Private K-12 TAM

(in R$ billion, 2018)

 

 

LOGO

 

Source: Oliver Wyman

Strong combination of content and technology teams dedicated to enhancing our value proposition

We value intellectual agility and structure ourselves in small multidisciplinary groups that are focused on building product functionality. We believe we have the most resourceful division of business intelligence and analytics in content adoption in the Brazilian K-12 market. Our digital team consists of 235 product, technology, digital operations and content specialists. Our product and technology specialists are organized in 11 teams, each being responsible for end-to-end implementation of projects aimed at accomplishing long-term goals.

Our content production is deeply linked to technology, allowing us to update content dynamically based on student and teacher feedback. To improve student engagement, we overlay content production with social media consumption (interactive video, podcasts and quizzes), aimed at promoting a pleasing aesthetic that captures the conceptual rigor essential for educational content. Our partner schools benefit from the unique combination of our Plurall products, a single platform that enables the delivery of a richer learning experience to both educators and students in an integrated and uniformed matter and combines in our content solutions in a 100% digital interface.



 

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Our data science team employs a science in learning approach by leveraging our streaming data pipeline, allowing for rapid evolution of our solutions and services. Our data analytics educational team is focused on (1) tracking user behavior and creating dashboards to improve student and teacher engagement with Plurall and its many features; (2) allowing educators to take advantage of engagement and learning dashboards to improve student participation in the learning experience both inside and outside the classroom; (3) providing seamless integration of the Plurall platform with external products; and (4) gathering feedback and improving content generation in real time.

We also have a forward-leaning approach to applying neuroscience in education. We have been developing the Learning Science Lab, by partnering with highly regarded scientists in Brazil through Rede Nacional de Ciência para Educação and BrainCo, a startup born out of the Harvard Innovation Lab, to develop neuroscience technology products, and collaborate with scientists from the MIT Media Lab to test the effectiveness of their technology and develop new applications for brainwave technology.

Robust salesforce, business intelligence team and customer-centric mindset lead to differentiated go-to-market strategy

Our relentless focus on understanding our customers has led us to assemble a robust salesforce and client support team. Our team is comprised of 219 educational specialists, or hunters, (divided among commercial teams and inside sales teams, responsible for general marketing strategy and targeted client sales, respectively) and 181 customer support experts, or farmers, who cover all Brazilian states through a differentiated go-to-market strategy where we target customers through multiple channels including online advertising, marketing research tools, on-site visits, social media, among others. We also have what we believe to be the largest business intelligence database and business intelligence team in the market. Our business intelligence team collects data from over 17,400 schools every year in order to have a comprehensive view of the total private K-12 market and to determine exactly what kind of products and services our salesforce should offer to each and every school. We offer our staff over 80 hours per year of training activities, on average, and 70% of our staff has been with us for over 3 years.

Our sales strategy allows educational specialists and customer support experts to establish themselves as trusted advisors for our partner schools and nurture relationships in order to keep on adding value through higher revenue streams, penetration, retention and awareness.

We seek to motivate our salesforce through financially aligned incentives based on new sales and client and revenue retention rates, among others. We also provide ongoing training, shadowing opportunities and participation in sales conferences.

Strong academic outcomes and recognition

The established tradition of our brands in the education sector, some of which have been developed over a period of more than 100 years, and our pioneering efforts in rolling out one of the first education subscription arrangement models in Brazil have contributed to our reputation for excellence. We believe our complete educational platform has translated into strong brand awareness, as demonstrated by the following:

 

   

Anglo is the top of mind brand among learning systems considering premium schools choices and, alongside pH, is among the top four most preferred brands among school administrators and educators according to Hello Research;

 

   

90% of premium schools know Pitágoras according to Hello Research; and

 

   

Publishers in our K-12 business have been honored with 102 Jabuti prizes since 1959, a widely recognized award as the most prestigious literary honor in Brazil.



 

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Quality perception is key for parents, and the quality of our pedagogical system and digital platform delivery is demonstrated by the following metrics:

 

   

As of December 31, 2018 (most recent public data), we had 504 partner schools ranked among the top three schools in their respective municipalities based on their scores in ENEM, of which 263 partner schools were ranked as the best school in their municipality; and

 

   

As of December 31, 2018 (most recent public data), we had 44 partner schools ranked among the top 250 schools in the country based on their scores on the ENEM.

Finally, the satisfaction of our customers (including students, parents, educators and administrators of private schools operating in the K-12 educational segment) and their positive experience with our platform is evidenced by our high net promoter score, or NPS, among core learning systems and digital learning brands. As of August 30, 2019, we scored 93 out of 100 possible points for both Anglo and pH learning systems, in a survey carried out by us with our partner schools, and 63 out of 100 possible points for our digital learning platform (Plurall), in a survey carried out by us with school coordinators.

The nature of our business model

Business model backed by solid fundamentals: we employ an asset-light business model centered on innovative and personalized content and user experience and focus on creating and maintaining long-standing relationships with partner schools. We are powered by technology and highly scalable, which allows for consistent high revenue growth.

End-to-end solutions provide meaningful unit economic gains: as we continue to strengthen our portfolio of full-service solutions, our potential to deepen relationships with schools increases through cross-sell and up-sell opportunities, generally at low incremental costs to us and to schools. We believe this leads to lifetime value at low customer acquisition cost while simultaneously increasing customer switching costs.

Self-reinforcing network effects of our virtuous cycle: we have created and have been nurturing an education cycle that entails scale, science in learning, high-quality and retainable learning, differentiated academic outcomes and recognition. Our company is based on information, using a robust team of business intelligence and analytics and source of big data with respect to the K-12 Brazilian industry, which is the start of a virtuous cycle for our partner schools. We help start the cycle by providing important data and key tools for schools to engage their students in a way that is meaningful for each student, providing enhancing learning, which we believe leads to better academic results and therefore improves schools’ reputations, which attracts more students



 

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to more schools. The cycle is reinforced as more students lead to more big data, which is the start of the cycle to provide the data needed to continue to engage our partner schools’ students.

 

 

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Experienced and focused management, with an innovation mindset

Our senior management is recognized in the industry for its experience, reputation, working knowledge and close relationship with our partner schools, and strong track record in terms of the educational business and innovation. We share the same operational culture as our parent company, and our senior management team has over 100 years of combined experience dedicated to education. As one of the largest education groups in the world, we believe our parent company brings expertise in school operations, a long track record of carrying out mergers and acquisitions and integrating new businesses and technologies, a history of constant evolution and high total shareholder return, effective and transparent communication with shareholders and the market in general, with high levels of corporate governance and a strong drive for innovation.

Our Growth Strategy

Increase shift towards solutions we characterize as subscription arrangements within our current customer base

We will continue focusing on increasing the percentage of our partner schools (and related stakeholders) adopting the solutions we characterize as subscription arrangements instead of purchasing content without a long-term contract. We believe there is a significant potential to increase the number of total students enrolled in solutions we characterize as subscription arrangements from 1.3 million as of March 31, 2020, to 2.6 million total students, by converting part of our current base of partner schools adopting core content without a long-term contract into clients of solutions we characterize as subscription arrangements, including through the execution of new PAR and learning system contracts. In 2019, 2018 and 2017, the subscription agreements represented 37.0%, 20.4% and 8.3%, respectively, of the total revenue from the sales of textbooks. In 2019, we sold products (including textbooks without subscription) to approximately 3.0 million students from private schools, of which 1.2 million were from schools that had a contractual relationship with us, which 1.2 million students out of 3.0 million represents 40% of potential students from schools that use our products. From December 31, 2018 to December 31, 2019 and from December 31, 2017 to December 31, 2018, we successfully signed up 7.8% (6.3% to PAR and 1.5% to learning systems) and 5.7% (4.0% to PAR and 1.7% to learning systems), respectively, of our existing partner schools as compared to the respective year-end date for the prior year without a long-term contract to long-term subscription arrangements.



 

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Increase penetration of our current services in existing capacity with our current partner school base

We utilize a land-and-expand strategy with our partner schools, beginning with core education and gradually increasing the amount of services offered to each partner school from our portfolio of complementary solutions and digital solutions. We focus on deepening relationships with our partner schools by leveraging our salesforce expertise to up-sell and cross-sell other products and services within our wide portfolio of current offers and future product and service developments and acquisitions. Our ultimate goal is to replace our partner schools’ collection of scattered educational vendors with our integrated platform of educational and digital solutions.

 

   

As of March 31, 2020, only 11.1% of our student base used both our core and socio-emotional solutions; and

 

   

As of March 31, 2020, only 2.6% of our student base used both our core and languages solutions.

 

 

LOGO

We believe there is significant potential to increase the total number of students enrolled in our solutions, considering our current base of partner schools and the fact that one student can be enrolled in more than one solution at the same time. As of March 31, 2020, we had 1.5 million enrollments in our solutions (1.31 million in core content and 0.18 million in complementary solutions), considering each student at each solution as an enrollment. Through cross-selling and up-selling across both our Content & EdTech Platform and Digital Platform, we believe we are able to capture up to 5.1 million new enrollments, totaling a potential of 6.6 million students enrolled in our ecosystem (including core content, socioemotional content, languages, STEAM and other academic content).

Grow our base of partner schools

We have significantly expanded our sales force and will continue doing so in new regions across Brazil, while pursuing greater market share in regions where we have strong brand awareness and price attractiveness, which has helped us establish a presence in 12.1% of the TAM for core education as of 2018. We intend to reinvest a portion of our operational leverage in marketing activities that are aligned with our objective to continue increasing our base of partner schools through our superior value offering and extensive and integrated offering of products and services.



 

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Increase the quantity of products and services we offer, including through in-house development, partnerships and acquisitions

We believe there is significant room to expand our value proposition to our partner schools and their stakeholders by adding new complementary education solution and digital platform to our ecosystem and, therefore, also significantly increasing our TAM potential. For instance, STEAM and academics are becoming “must-have” skills given increasing competition in the labor market. In addition, schools have been increasingly adopting management systems so they can focus on what they do best: educating.

We believe we can expand our current product offering, enhance our content and technology platforms and improve students’ learning, educators’ teaching and schools’ management experience by either developing innovative digital content in-house, engaging in strategic partnerships or carrying out mergers and acquisitions of companies and/or products that will contribute additional content or technologies to our portfolio. For example, we have identified a wide range of potential target acquisitions in Brazil that we believe will complement our business, in particular with respect to the delivery of digital solutions. With the expansion of our scope and product and service offerings through our platform, our TAM could increase even further. See “Presentation of Financial and Other Information—Corporate Events” for our recent acquisitions.

Expand internationally

We believe schools, students, educators and families in Latin America are facing the same problems as in Brazil and demand the same solutions we are currently offering. Despite Spanish and Portuguese being different languages, the stakeholders’ needs are the same and we are able to fulfill many of those since we are already producing educational content in Spanish.

Our Corporate Structure

Our Incorporation and Corporate Reorganization

We are a Cayman Islands exempted company incorporated with limited liability on October 16, 2019 for purposes of undertaking our initial public offering, fully owned by Cogna on the date hereof.

Prior to this offering, our parent company, Cogna, reorganized its K-12 business under its wholly-owned subsidiary, Somos Sistemas de Ensino S.A., or Somos Sistemas, as described under “Presentation of Financial and Other Information—Corporate Events—Our Incorporation and Corporate Reorganization.” Prior to the consummation of this offering, Cogna will consummate the contribution of the entirety of the shares of Somos Sistemas held by Cogna to Vasta, or the Contribution. The Contribution will be accounted for at historical book value, in return for new Class B common shares issued by Vasta in a one-to-58 exchange for the shares of Somos Sistemas contributed to us. Until the Contribution of Somos Sistemas’ shares to us, we will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments. Following the Contribution, Saber will continue to own and operate, directly or through other subsidiaries, certain K-12 businesses as a subsidiary of Cogna, including the operation of its own K-12 private schools and the sales of textbooks under the National Textbook Program (Programa Nacional do Livro e do Material Didático), or PNLD, which are separate from Vasta’s business.

After accounting for the new Class A common shares that will be issued and sold by us in this offering, we will have a total of 83,011,585 common shares issued and outstanding immediately following this offering, 64,436,093 of these shares will be Class B common shares beneficially owned by Cogna (which will hold 97.2% of the combined voting power of our outstanding Class A and Class B common shares), and 18,575,492 of these shares will be Class A common shares beneficially owned by investors purchasing in this offering (which will hold 2.8% of the combined voting power of our outstanding Class A and Class B common shares). As a result,



 

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following this offering, our parent company will continue to control the outcome of all decisions at our shareholders’ meetings and will be able to elect a majority of the members of our board of directors. Our parent company will also be able to direct our actions in areas such as business strategy, financing, distributions, acquisitions and dispositions of assets or businesses. In addition, following the offering, we will be a “controlled company” within the meaning of the Nasdaq corporate governance standards and as such plan to rely on available exemptions from certain Nasdaq corporate governance requirements. See “Risk Factor—Our parent company, our sole shareholder prior to this offering, will own 100% of our outstanding Class B common shares, which represent approximately 97.2% of the voting power of our issued share capital and 77.6% of our total equity ownership following the offering, and will control all matters requiring shareholder approval. Our parent company’s ownership and voting power limits your ability to influence corporate matters.”

The following chart shows our corporate structure after giving effect to this offering*:

 

LOGO

 

*

Investors in this offering will not have any interest in Cogna or its subsidiaries other than Vasta or its subsidiaries.

Recent Developments

COVID-19

As a result of the global outbreak of a novel strain of coronavirus, or COVID-19, unprecedented economic uncertainties have arisen that continue to have an adverse impact on global economic and market conditions, including in Brazil. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the Brazilian federal government declared a national emergency with respect to COVID-19. In addition, state and municipal authorities in Brazil ordered suspensions of a variety of economic activities as part of measures taken to mitigate the dissemination of the virus.

The global impact of the outbreak has been rapidly evolving and the outbreak presents material uncertainty and risk with respect to our future performance and financial results. In response to the outbreak, we have implemented several measures aimed at safeguarding the health of our employees and the stability of our operations, including: (1) the implementation of a work from home policy; (2) the reduction in the work hours and wages by 25% of our administrative and corporate employees for the months of May, June and July; (3) on-line campaigns to promote our products to potential new customers; and (4) the implementation in our distribution centers of health and safety measures recommended by government authorities. In addition, we have



 

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accelerated the expansion of our digital education solutions to help keep the private school system operating during the COVID-19 pandemic, seeking to maintain the continuity in our operations and minimize the impacts of the pandemic on students enrolled at our partner schools. Through the integration of our Plurall and Plurall Maestro platforms with Google Hangouts, we have allowed students to access live classroom instruction remotely along with the instructional content already available through Plurall, such as ongoing homework and learning exercises, access to tutors, and an online library with a variety of content in different formats. We continue to monitor the availability and use of these solutions and engaged students for their feedback, which has been very positive during the pandemic. From March 23, 2020 (when the integration of Plurall platform with Google Meet was completed) to the date of this prospectus, we have conducted more than 3 million digital class sessions. Additionally, as of the date of this prospectus, we had more than 1.3 million students using our platforms, participating in more than 50,000 classes daily during week days.

We cannot predict the extent the extent of the impact of COVID-19 on our business or that any of the measures we have taken in response to the pandemic will be effective in mitigating the impact of COVID-19 on our business.

In connection with social distancing and social isolation measures implemented by state and local governments in Brazil in response to the COVID-19 pandemic, and considering the effect of such measures on the education sector, certain of our partner schools experienced a decline in enrollment during the first half of the year, particularly in respect of early childhood education. Certain of our partner schools requested to decrease their level of purchases of educational materials and solutions we characterize as subscription arrangements for the second half of our 2020 sales cycle (which comprises the period between October 1, 2019 and September 30, 2020). On January 23, 2020 we had announced the result of ACV Bookings for the 2020 cycle (from October 2019 to September 2020), which reached R$716.0 million based on contracted amounts as of such date. This volume represented growth of 25% over the amount registered in the 2019 sales cycle. Notwithstanding such an increase, we believe that the revenue in the year 2020 to be derived from solutions we characterize as subscription arrangements will be adversely affected by such effects of declining enrollment at our partner schools. Such assessment on revenues derived from solutions we characterize as subscription arrangements is not a guarantee of future performance or outcomes and should not be relied on as guidance. Moreover, ACV Bookings is a non accounting managerial metric designed to show amounts that we expect to be recognized as revenue from subscription services during our commercial sales cycle and not for the fiscal year, ACV Bookings is only one metric in measuring the components of our revenues, and ACV Bookings in isolation is not indicative of our total revenues. ACV Bookings amounts refer only to amounts contracted by us and should not be considered as a forecast or estimate of our revenues. See “Presentation of Financial and Other Information—Special Note Regarding ACV Bookings” and “Cautionary Statement Regarding Forward-Looking Statements.”

For further information, please see “Risk Factors—Risks Relating to Our Business and Industry—Our operations and results may be negatively impacted by the COVID-19 pandemic” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Trend Information.”

Preliminary Results for First Semester of 2020

Our financial results for the six months ended June 30, 2020 are not yet finalized. The following information reflects our preliminary results for this period:

Net revenue from sales and services for the six months ended June 30, 2020 is expected to be between R$507.2 million and R$515.6 million, an increase of approximately 3.3% to 5.0% as compared to the six months ended June 30, 2019, primarily due to an increase in students enrolled in our complementary education solutions in the first semester as well as the integration of Pluri following its acquisition in January 2020. The 11.1% increase in net revenue from sales and services in the first quarter of 2020 was partially offset by an expected



 

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16.8% to 10.7% decrease in net revenue from sales and services in the second quarter of 2020 compared to the preceding period, primarily as a result of seasonality generated by growth in solutions with revenue more concentrated in the first quarter.

Net revenue from sales and services from the solutions we characterize as subscription arrangements for the six months ended June 30, 2020 is expected to account between 71.3% and 72.1% of net revenue from sales and services, compared to an estimated 67.0% to 67.8% for the six months ended June 30, 2019. This expected variation is primarily due to an increase in students enrolled in our complementary education solutions in the first semester of 2020.

Net loss for the six months ended June 30, 2020 is expected to be between R$32.9 million and R$24.1 million, a reduction of approximately 25.0% to 45.0% as compared to the six months ended June 30, 2019. The expected reduction in net loss was primarily due to the increase in net revenue from sales and services and a decrease in finance costs when compared to the same period of 2019.

EBITDA for the six months ended June 30, 2020 is expected to be between R$103.2 million and R$111.5 million, an increase of approximately 0.0% to 8.0% as compared to the six months ended June 30, 2019. The expected increase in EBITDA is primarily the result of an increase in net revenue from sales and services, offset by (1) an increase in costs due to an inventory adjustment arising from the cycle count in the amount of R$8.3 million and (2) an increase of approximately R$5.5 million in impairment losses on trade receivables due to the expected impact of the COVID-19 outbreak on our credit losses.

The number of total students enrolled in solutions we characterize as subscription arrangements as of June 30, 2020 is 1,311 thousand compared to 1,186 thousand as of June 30, 2019.

Reconciliation of our EBITDA to Net Profit (Loss) for the Period

 

     For Six Months Ended
June 30, 2020
 
     Successor (Vasta)  
     Low      High  
     (estimated)  
     R$ millions  

Net profit (loss) for the period

     (32,894      (24,123

(+) Income tax and social contribution

     (16,403      (12,029

(+/-) Finance result

     66,992        62,106  

(+) Depreciation and amortization

     85,550        85,550  
  

 

 

    

 

 

 

EBITDA

     103,245        111,504  
  

 

 

    

 

 

 

Cautionary Statement Regarding Preliminary Results

While the preliminary results have been prepared in good faith and based on information available at the time of preparation, no assurance can be made that actual results will not change as a result of our management’s review of results and other factors. The preliminary results presented above are subject to finalization and closing of our accounting books and records (which have yet to be performed) and should not be viewed as a substitute for full quarterly financial statements prepared in accordance with IFRS. The preliminary results depend on several factors, including weaknesses in our internal controls and financial reporting process (as described under “Risk Factors”) and our ability to timely and accurately report our financial results in the context of our corporate reorganization and the combined carve-out financial presentation. In addition, the estimates and assumptions underlying the preliminary results include, among other things, economic, competitive, regulatory and financial



 

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market conditions and business decisions that may not be accurately reflected and that are inherently subject to significant uncertainties and contingencies, including, among others, risks and uncertainties described in the section entitled “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements,” all of which are difficult to predict and many of which are beyond our control. There can be no assurance that the underlying assumptions or estimates will be realized; in particular, while we do not expect that our estimated preliminary results will differ materially from our actual results for the six months ended June 30, 2020, we cannot assure you that our estimated preliminary results for the six months ended June 30, 2020 will be indicative of our financial results for future interim periods or for the full year ending December 31, 2020. As a result, the preliminary results cannot necessarily be considered predictive of actual operating results for the periods described above, and this information should not be relied on as such. You should read this information together with the sections of this prospectus entitled “Selected Financial and Other Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” the audited combined carve-out financial statements and the unaudited interim condensed consolidated carve-out financial statements, in each case included elsewhere in this prospectus.

The preliminary results presented above were prepared by and are the responsibility of our management. No independent registered public accounting firm has examined, compiled or otherwise performed any procedures with respect to the financial information contained in these preliminary results. Accordingly, no independent registered public accounting firm has expressed any opinion or given any other form of assurance with respect thereto and no independent registered public accounting firm assumes any responsibility for the preliminary results. The reports of the independent registered public accounting firm included elsewhere in this prospectus relate to the historical financial information of Vasta. Such reports do not extend to the preliminary results and should not be read to do so.

By including in this prospectus a summary of certain preliminary results regarding our financial and operating results, neither we nor any of our respective advisors or other representatives has made or makes any representation to any person regarding the ultimate performance of Vasta compared to the information contained in the preliminary results and actual results may materially differ from those described above and we do not undertake any obligation unless required by applicable law to update or otherwise revise the preliminary results set forth herein to reflect circumstances existing since their preparation or to reflect the occurrence of unanticipated events or to reflect changes in general economic or industry conditions, even in the event that any or all of the underlying assumptions are shown to be in error.

Summary of Risk Factors

An investment in our Class A common shares is subject to a number of risks, including risks relating to our business and industry, risks related to Brazil and risks related to the offering and our Class A common shares. The following list summarizes some, but not all, of these risks. Please read the information in the section entitled “Risk Factors” for a more thorough description of these and other risks.

Certain Factors Relating to Our Business and Industry

 

   

Our operations and results may be negatively impacted by the COVID-19 pandemic.

 

   

We face significant competition and the possibility of new competitors and potential substitutes for every product or service we offer and in each geographic region in which we operate. If we fail to compete efficiently, we may lose market share and our profitability may be adversely affected.

 

   

We depend significantly on information technology, or IT, systems, and are subject to risks related to technological change. Any failure to maintain and support customer facing services, systems, and platforms, including addressing quality issues and executing timely release of new products and enhancements, could negatively impact our revenue and reputation.



 

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Our revenue depends on sales of educational content, products and services to our customers, and any setback in customer relations could cause us significant harm.

 

   

Our growth may have a negative effect on the successful expansion of our business, on our people management, and on the increase in complexity of our software and platforms. In addition, if our growth rate decelerates significantly, our future prospects and financial results would be adversely affected, preventing us from achieving profitability.

 

   

Our business depends on the success of our brands and our ability to attract and retain customers could be adversely affected due to events or conditions that damage our reputation or the image of our brands.

 

   

Misuse of our brands or other actions carried out by other companies controlled by our parent company may damage our business and our reputation due to certain of our brands being shared with other businesses controlled by our parent company.

 

   

Failure to protect or enforce our intellectual property and other proprietary rights could adversely affect our business and financial condition and results of operations. In addition, we may in the future be subject to intellectual property claims, which are costly to defend and could harm our business, financial condition and operating results.

 

   

The quality of the teaching content we deliver to our customers depends to a significant degree on the quality of our publishers and of the content we purchase. Any issues related to obtaining this content or regarding the quality of this content may have an adverse effect on our business.

 

   

We may not be able to implement our business strategy as intended, including relating to our PAR product, cross-selling and up-selling to our existent base, entering new markets and business, especially regarding our Digital Platform, expanding our complementary education portfolio, carrying out new or integrating existing acquisitions and increasing our base of partner schools, which could have an adverse effect on our results.

 

   

If we are unable to retain or replace our key personnel or are unable to attract, retain and develop other qualified employees, our business, financial situation and operating results may be adversely affected.

Certain Factors Relating to Brazil

 

   

The Brazilian federal government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement as well as Brazil’s political, regulatory, legal and economic conditions could harm us and the price of our Class A common shares.

 

   

The ongoing economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares.

 

   

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

 

   

Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may harm the Brazilian economy and the price of our Class A common shares.

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

 

   

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



 

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Upon our corporate reorganization and prior to the completion of this offering, Cogna, will own 100% of our Class B common shares, which represent approximately 97.2% of the voting power of our issued share capital and 77.6% of our total equity ownership following the offering (assuming no exercise of the underwriters option to purchase additional shares), and will control all matters requiring shareholder approval. This concentration of ownership and voting power limits your ability to influence corporate matters.

 

   

The market price of our shares may be volatile or may decline sharply or suddenly, regardless of our operating performance, and we may not be able to meet investors’ or analysts’ expectations. You may not be able to resell your shares for the initial offer price or above it and you may lose all or part of your investment. In addition, the price of our Class A common shares may be subject to changes in the price of the shares of our parent company.

 

   

Our dual class capital structure means our shares will not be included in certain indices. We cannot predict the impact this may have on our share price. The dual class structure also has the effect of concentrating voting control with our parent company; this will limit or preclude your ability to influence corporate matters.

 

   

We are a Cayman Islands exempted company with limited liability. The rights of our shareholders, including with respect to fiduciary duties and corporate opportunities, may be different from the rights of shareholders governed by the laws of U.S. jurisdictions.

Corporate Information

Our principal executive offices are located at Av. Paulista, 901, 5th Floor, Bela Vista, São Paulo—SP, CEP 01310-100, Brazil. Our telephone number at this address is +55-11-3133-7311. Our email address is ri@somoseducacao.com.br.

Investors should contact us for any inquiries through the address, telephone number and email listed above. Our principal website is http://www.vastaedu.com.br. The information contained in, or accessible through, our website is not incorporated into this prospectus or the registration statement of which it forms a part. You should not consider information contained on our website to be part of this prospectus or in deciding whether to invest in our Class A common shares.

Implications of Being an Emerging Growth Company

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

 

   

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

 

   

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

 

   

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

 

   

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



 

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We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual revenue of at least US$1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our shares that is held by non-affiliates exceeds US$700.0 million as of the prior June 30, and (2) the date on which we have issued more than US$1.07 billion in non-convertible debt during the prior three-year period. As an emerging growth company, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies in the United States that are not emerging growth companies. Accordingly, the information about us available to you will not be the same as, and may be more limited than, the information available to shareholders of a non-emerging growth company.

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



 

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THE OFFERING

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

 

Issuer

Vasta Platform Limited.

 

Class A common shares offered by us

Class A common shares (or Class A common shares if the underwriters exercise in full their option to purchase additional Class A common shares from us).

 

Offering price range

US$19.00 per Class A common share.

 

Voting rights

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

 

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

 

  If, at any time, the total number of the issued and outstanding Class B common shares is less than 10% of the total number of shares outstanding, then each Class B common share will convert automatically into one Class A common share.

 

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

 

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

 

  Upon consummation of this offering, assuming no exercise of the underwriters’ option to purchase additional shares, (1) holders of Class A common shares will hold approximately 2.8% of the combined voting power of our outstanding common shares and approximately 22.4% of our total equity ownership and (2) holders of Class B common shares will hold approximately 97.2% of the combined voting power of our outstanding common shares and approximately 77.6% of our total equity ownership.

 

 

If the underwriters exercise their option to purchase additional shares in full, (1) holders of Class A common shares will hold approximately 3.2% of the combined voting power of our outstanding common



 

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shares and approximately 24.9% of our total equity ownership and (2) holders of Class B common shares will hold approximately 96.8% of the combined voting power of our outstanding common shares and approximately 75.1% of our total equity ownership.

 

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

 

Option to purchase additional Class A common shares

We have granted the underwriters the right to purchase up to an additional 2,786,323 Class A common shares from us within 30 days of the date of this prospectus, at the public offering price, less underwriting discounts and commissions, on the same terms as set forth in this prospectus.

 

Listing

Our Class A common shares have been approved for listing on the Nasdaq Global Select Market, under the symbol “VSTA.”

 

Use of proceeds

We estimate that the net proceeds to us from the offering will be approximately US$328.8 million (or US$378.9 million if the underwriters exercise in full their option to purchase additional shares) after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. We intend to use approximately one half of the net proceeds from this offering to repay part of the debt owed to our parent company and the other half of the net proceeds to fund expansion through future acquisitions or investments in complementary businesses, products or technologies (including to pay the balance of the purchase price of MindMakers). See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Indebtedness” and “Related Party Transactions—Private Debentures” and “Presentation of Financial and Other Information—Corporate Events.” We will have broad discretion in allocating a portion of the net proceeds from this offering. See “Use of Proceeds.”

 

Share capital before and after offering

As of the date of this prospectus, our authorized share capital is US$50,000, consisting of 1,000,000,000 shares of par value US$0.00005 each. Of those authorized shares, (1) 500,000,000 are designated as Class A common shares, (2) 250,000,000 are designated as Class B common shares, and (3) 250,000,000 are as yet undesignated and may be issued as common shares or shares with preferred rights.


 

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  Immediately after the offering, we will have 18,575,492 Class A common shares outstanding and 64,436,093 Class B common shares outstanding, assuming no exercise of the underwriters’ option to purchase additional shares.

 

Dividend policy

The amount of any distributions will depend on many factors, such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors and shareholders. See “Dividends and Dividend Policy.”

 

Lock-up agreements

We have agreed with the underwriters, subject to certain exceptions, not to offer, sell, or dispose of any shares of our share capital or securities convertible into or exchangeable or exercisable for any shares of our share capital during the 180-day period following the date of this prospectus. Members of our board of directors and our executive officers, and Cogna, our sole shareholder, have agreed to substantially similar lock-up provisions, subject to certain exceptions. See “Underwriting.”

 

Risk factors

See “Risk Factors” and the other information included in this prospectus for a discussion of factors you should consider before deciding to invest in our Class A common shares.

 

Cayman Islands exempted company with limited liability

We are a Cayman Islands exempted company with limited liability. The rights of shareholders and the responsibilities of members of our board of directors may be different from the rights of shareholders and responsibilities of directors in companies governed by the laws of U.S. jurisdictions. In particular, as a matter of Cayman Islands law, directors of a Cayman Islands company owe fiduciary duties to the company and separately a duty of care, diligence and skill to the company. Under Cayman Islands law, directors and officers owe the following fiduciary duties: (1) duty to act in good faith in what the director or officer believes to be in the best interests of the company as a whole; (2) duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose; (3) directors should not properly fetter the exercise of future discretion; (4) duty to exercise powers fairly as between different sections of shareholders; (5) duty to exercise independent judgment; and (6) duty not to put themselves in a position in which there is a conflict between their duty to the company and their personal interests. Our Articles of Association have varied this last obligation by providing that a director must disclose the nature and extent of his or her interest in any contract or arrangement, and following such disclosure and subject to any separate requirement under applicable law or the listing rules of the Nasdaq, and unless disqualified by the chairman of the relevant meeting, such director may vote in respect of any transaction or arrangement in which he or she is interested and may be counted in the quorum at the meeting. In comparison, under the Delaware General Corporation Law, a director of a Delaware corporation owes fiduciary duties to the corporation and its



 

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stockholders comprised of the duty of care and the duty of loyalty. Such duties prohibit self-dealing by a director and mandate that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. See “Description of Share Capital—Principal Differences between Cayman Islands and U.S. Corporate Law.”

Unless otherwise indicated, all information contained in this prospectus assumes no exercise of the option granted to the underwriters to purchase up to additional 2,786,323 Class A common shares in connection with the offering.



 

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SUMMARY FINANCIAL AND OTHER INFORMATION

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

As discussed elsewhere in this prospectus, our parent company, through its subsidiary Saber, acquired Somos Group in October 11, 2018, and as a result, assets and liabilities of the acquired company were recorded to their fair values as of the closing date of such Acquisition in accordance with the acquisition method of accounting. The acquisition method of accounting was used to record assets acquired and liabilities assumed. Such accounting generally results in increased amortization and depreciation reported in future periods. Accordingly, the accompanying financial statements of the Predecessors and Vasta are not comparable in all material respects since those financial statements report financial position, results of operations, and cash flows of these separate entities.

Due to the change in the basis of accounting resulting from the acquisition by Cogna of the K-12 curriculum businesses held by the Somos Group, and because the K-12 business held by Cogna (Predecessor – Pitágoras) came into common control with such K-12 curriculum business previously held by the Somos Group only upon completion of the Acquisition, we are required to present separately (1) the financial information for the period beginning on October 11, 2018 through and including December 31, 2019, which we refer to as the “Post-Acquisition Period,” and (2) the financial information for the periods prior to, and including, October 10, 2018, which we refer to as the “Pre-Acquisition Period.” Certain financial information of the Post-Acquisition Period is not comparable to that of the Pre-Acquisition Period. For a discussion of our Post-Acquisition and Pre-Acquisition Periods, see “Presentation of Financial and Other Information—Financial Statements.”



 

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We have derived the summary statement of profit or loss data (1) for the three months ended March 31, 2020 and 2019 from the Sucessor’s unaudited interim condensed combined financial statements included elsewhere in this prospectus; (2) for the year ended December 31, 2019 and for the period from October 11 to December 31, 2018 from the Successor’s audited combined carve-out financial statements included elsewhere in this prospectus; and (3) for the period from January 1 to October 10, 2018 and for the year ended December 31, 2017 from the Predecessors’ audited carve-out financial statements included elsewhere in this prospectus. We have derived the statement of financial position data (1) as of March 31, 2020 from the Successor’s unaudited interim condensed combined financial statements included elsewhere in this prospectus; (2) as of December 31, 2019 and 2018 from the Successor’s audited combined carve-out financial statements included elsewhere in this prospectus; and (3) as of December 31, 2017 from the Predecessors’ audited carve-out financial statements included elsewhere in this prospectus. We prepare our financial statements in accordance with IFRS, as issued by the IASB. Our historical results are not necessarily indicative of the results that should be expected in the future.

 

     For Three Months Ended March 31,  
         2020             2020             2019      
     Successor (Vasta)  
     US$ millions(1)     R$ millions  

Statement of Profit or Loss

      

Net revenue from sales and services

     75.5       392.4       353.1  

Net revenue from sales

     74.8       389.1       350.1  

Net revenue from services

     0.6       3.3       3.0  

Costs of goods sold and services

     (32.2     (167.3     (179.3
  

 

 

   

 

 

   

 

 

 

Gross profit

     43.3       225.1       173.8  
  

 

 

   

 

 

   

 

 

 

General and administrative expenses(2)

     (28.3     (147.1     (112.8

Other operating income, net

     0.2       0.8       2.0  
  

 

 

   

 

 

   

 

 

 

Profit (loss) before finance result and taxes

     15.1       78.8       63.0  
  

 

 

   

 

 

   

 

 

 

Finance income

     1.0       5.1       0.8  

Finance costs

     (8.6     (44.7     (41.0
  

 

 

   

 

 

   

 

 

 

Finance result

     (7.6     (39.6     (40.2
  

 

 

   

 

 

   

 

 

 

Profit before income tax and social contribution

     7.5       39.1       22.8  

Income tax and social contribution

     (2.2     (11.5     (7.9
  

 

 

   

 

 

   

 

 

 

Net profit for the period

     5.3       27.6       14.9  
  

 

 

   

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts in reais for the three months ended March 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.



 

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(2)

Contains the sum of general and administrative expenses, commercial expenses and impairment losses on trade receivables.

 

    For Year Ended
December 31, 2019
    For Period
from
October 11 to
December 31,
2018
    For Period from
January 1 to October 10,
2018
    For Year Ended
December 31, 2017
 
    Successor (Vasta)     Predecessor-
Somos-
Anglo
    Predecessor-
Pitágoras
    Predecessor-
Somos-
Anglo
    Predecessor-
Pitágoras
 
    US$
millions(1)
    R$ millions     R$ millions  

Statement of Profit or Loss

               

Net revenue from sales and services

    190.4       989.7       246.4       518.5       80.6       686.0       99.4  

Net revenue from sales

    186.8       971.3       241.2       500.4       80.6       663.4       99.4  

Net revenue from services

    3.6       18.4       5.2       18.2       —         22.6       —    

Costs of goods sold and services

    (86.0     (447.0     (69.9     (221.0     (28.2     (255.2     (35.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    104.4       542.6       176.5       297.6       52.4       430.7       64.2  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses(2)

    (89.5     (465.3     (138.3     (453.6     (13.4     (332.5     (12.4

Other operating income (expenses), net

    1.0       5.1       2.9       4.3       —         (1.9     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) before finance result and taxes

    15.9       82.5       41.0       (151.8     39.0       96.3       51.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance income

    1.0       5.4       3.9       26.8       1.2       21.8       0.8  

Finance costs

    (34.3     (178.2     (41.2     (221.4     —         (128.7     —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Finance result

    (33.2     (172.8     (37.3     (194.6     1.1       (106.9     0.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Profit before income tax and social contribution

    (17.4     (90.3     3.7       (346.3     40.2       (10.6     52.7  

Income tax and social contribution

    5.7       29.6       (4.7     (267.0     (13.7     2.1       (17.9
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net profit (loss) for the period / year

    (11.7     (60.7     (1.0     (613.3     26.5       (8.5     34.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts in reais for the year ended December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.



 

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(2)

Contains the sum of general and administrative expenses, commercial expenses and impairment losses on trade receivables.

 

    As of
March 31,
2020
    As of
December 31,
2019
    As of
December 31,
2018
          As of December 31, 2017  
    Successor           Predecessor-
Somos-
Anglo
    Predecessor-
Pitágoras
 
    US$
millions(1)
    R$
millions
    US$
millions(1)
    R$ millions           R$ millions  

Statement of Financial Position:

                 

Assets

                 

Total current assets

    180.0       935.6       147.6       767.2       738.0           614.8       87.3  

Total non-current assets

    1,037.0       5,391.3       1,038.8       5,400.6       5,401.7           748.5       5.7  

Total assets

    1,217.0       6,326.9       1,186.3       6,167.8       6,139.7           1,363.3       93.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Liabilities and parent’s net investment

                 

Total current liabilities

    228.3       1,187.0       210.4       1,093.7       974.7           828.1       26.8  

Total non-current liabilities

    387.9       2,016.7       379.7       1,974.0       1,896.5           1,014.3       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total liabilities

    616.2       3,203.7       590.1       3,067.7       2,871.2           1,842.4       26.8  

Total parent’s net investment

    600.7       3,123.2       596.3       3,100.1       3,268.5           (479.1     66.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total liabilities and parent’s net investment

    1,217.0       6,326.9       1,186.3       6,167.8       6,139.7           1,363.3       93.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts in reais as of March 31, 2020 and December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020, as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

Non-GAAP Financial Measures

Adjusted EBITDA, Free Cash Flow and Adjusted Cash Conversion Ratio

 

     For Three Months Ended March 31,  
         2020             2020             2019      
     Successor (Vasta)  
     US$ millions(1)     R$ millions  

Adjusted EBITDA(2)

     23.4       121.5       105.7  

Free Cash Flow(3)

     10.4       53.8       (183.3
  

 

 

   

 

 

   

 

 

 

Adjusted Cash Conversion Ratio(4)

     69.7     69.7     (166.8 %) 
  

 

 

   

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts in reais for the three months ended March 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

(2)

We calculate Adjusted EBITDA as Net profit for the period plus income taxes and social contribution plus/minus net finance result plus depreciation and amortization plus/minus: (a) share-based compensation



 

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  expenses; and (b) provision for risks of tax, civil and labor losses regarding penalties, due to income tax positions taken by the Predecessor Somos—Anglo and the Successor in connection with a corporate reorganization carried out by the Predecessor Somos—Anglo. For a reconciliation of our Adjusted EBITDA to Net profit for the Period / Year, see “Selected Financial and Other Information—Reconciliations for Non-GAAP Financial Measures—Reconciliation of our Adjusted EBITDA to Net profit for the Period / Year.”
(3)

We calculate Free Cash Flow as the net cash flows from operating activities as presented in the statement of cash flows of our unaudited interim condensed combined financial statements plus/minus: (i) acquisition of property, plant and equipment; (ii) addition to intangible assets; and (iii) acquisition of subsidiaries. For a reconciliation of our Free Cash Flow to Net Cash From Operating Activities for the Period see “Selected Financial and Other Information—Reconciliations for Non-GAAP Financial Measures—Reconciliation of Free Cash Flow to Net Cash Flows from Operating Activities.”

(4)

We calculate Adjusted Cash Conversion Ratio as the cash flows from operating activities divided by Adjusted EBITDA for the relevant period. For a reconciliation of our Adjusted Cash Conversion Ratio for the Period, see “Selected Financial and Other Information—Reconciliations for Non-GAAP Financial Measures—Reconciliation of Adjusted Cash Conversion Ratio for the Period / Year.”

 

    For Year Ended
December 31,
    For Period
from
October 11 to
December 31,
          For Period from
January 1 to October 10,
    For Year Ended
December 31,
 
    2019     2019     2018           2018     2018     2017     2017  
    Successor (Vasta)           Predecessor-
Somos-
Anglo
    Predecessor-
Pitágoras
    Predecessor-
Somos-
Anglo
    Predecessor-
Pitágoras
 
    US$
millions(1)
    R$ millions           R$ millions  

Adjusted EBITDA(2)

    48.9       254.0       63.2           105.6       39.4       145.1       51.9  

Free Cash Flow(3)

    (8.3     (43.0     (13.7         (128.9     83.6       74.5       28.4  

Adjusted Cash Conversion Ratio(4)

    2.8     2.8     4.9         (88.2 %)      214.9     71.4     54.6

 

(1)

For convenience purposes only, amounts in reais for the year ended December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate . See “Exchange Rates” for further information about recent fluctuations in exchange rates.

(2)

We calculate Adjusted EBITDA as Net profit (loss) for the period / year plus income taxes and social contribution plus/minus net finance result plus depreciation and amortization plus/minus: (a) share-based compensation expenses; and (b) provision for risks of tax, civil and labor losses regarding penalties, due to income tax positions taken by the Predecessor Somos—Anglo and the Successor in connection with a corporate reorganization carried out by the Predecessor Somos—Anglo. For a reconciliation of our Adjusted EBITDA to Net profit for the Period / Year, see “Selected Financial and Other Information—Reconciliations for Non-GAAP Financial Measures—Reconciliation of our Adjusted EBITDA to Net profit for the Period / Year.”

(3)

We calculate Free Cash Flow as the net cash flows from operating activities as presented in the statement of cash flows of our audited combined carve-out financial statements plus/minus: (i) acquisition of property, plant and equipment; (ii) addition to intangible assets; and (iii) acquisition of subsidiaries. For a reconciliation of our Free Cash Flow to Net Cash From Operating Activities for the Period / Year, see “Selected Financial and Other Information—Reconciliations for Non-GAAP Financial Measures—Reconciliation of Free Cash Flow to Net Cash Flows from Operating Activities.”



 

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(4)

We calculate Adjusted Cash Conversion Ratio as the cash flows from operating activities divided by Adjusted EBITDA for the relevant period. For a reconciliation of our Adjusted Cash Conversion Ratio for the Period / Year, see “Selected Financial and Other Information—Reconciliations for Non-GAAP Financial Measures—Reconciliation of Adjusted Cash Conversion Ratio for the Period / Year.”

Operating Data

ACV Bookings

The tables below show ACV Bookings for the periods indicated. On January 23, 2020, we announced the result of ACV Bookings for the 2020 sales cycle (from October 2019 to September 2020), which reached R$716.0 million based on contracted amounts as of such date. This volume represents growth of 25% over the amount registered in the 2019 sales cycle. The number of enrolled students and average ticket per student per year for deriving results of ACV Bookings for the 2020 sales cycle were 1,311 thousand and R$546.07, respectively. Both the ACV Bookings and the average ticket are calculated based on the sum of actual contracts signed during the sales period and assumes the historical rates of returned goods from customers for the preceding 24-month period. Since the actual rates of returned goods from sales during the period may be different from the historical average rates and the actual volume of merchandise ordered by our customers may be different from the contracted amount, the actual revenue recognized during the period between October 2019 and September 2020 may be different from the ACV Bookings for the 2020 sales cycle. The COVID-19 pandemic may have an adverse effect on our ACV Bookings for the 2020 and 2021 sales cycle (from October 2020 to September 2021), and while we have implemented certain measures to address the potential impact of COVID-19 on our ACV Bookings and business in general, we believe that our actual revenue recognized in the year 2020 to be derived from solutions we characterize as subscription arrangements will be adversely affected by effects of declining enrollment at our partner schools during the first half of 2020, particularly in respect of childhood education. See “Risk Factors—Risks Relating to Our Business and Industry—Our operations and results may be negatively impacted by the COVID-19 pandemic” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Trend Information.”

 

     As of and For Three Months
Ended March 31, 2020(1)
 
     Successor (Vasta)  

Number of partner schools

     4,167  

Number of enrolled students (in thousands)

     1,311.0  

Core content

     1,311.0  

Complementary education solutions(2)

     179  

Average ticket per student per year (R$)

   R$ 546.1  

Average ticket per student per year (US$)(3)

   US$ 105.0  

ACV Bookings (R$ in millions)(4)

   R$ 716.0  

ACV Bookings (US$ in millions)(1)(4)

   US$ 137.7  

 

(1)

For the 2020 school year (which we define for purposes of ACV Bookings as the period starting in October 1, 2019 and ending in September 30, 2020). It does not take into account increases in schools, students and ACV Bookings as a result of acquisitions, such as MindMakers, which was acquired at the beginning of 2020.

(2)

Includes LEM (Líder em Mim), English Stars and Bilingual Experience. Does not include MindMakers, which was acquired at the beginning of 2020.

(3)

For convenience purposes only, amounts in reais as of March 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.



 

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(4)

We define ACV Bookings as the revenue we would expect to recognize from a partner school in each school year, based on the number of students who have contracted our services, or “enrolled students,” that will access our content at such partner school in such school year. ACV Bookings is a non-accounting managerial operating metric and is not prepared in accordance with IFRS. For more information about ACV Bookings, see “Presentation of Financial and Other Information—Special Note Regarding ACV Bookings.”

 

    As of and For Year Ended December 31,           As of and For Year Ended December 31,  
    2019(1)     2019(2)                 2018(3)                 2018(3)                 2017(4)                 2017(4)        
    Successor (Vasta)           Predecessor-
Somos-Anglo
    Predecessor-
Pitágoras
    Predecessor-
Somos-Anglo
    Predecessor-
Pitágoras
 
    US$ (1)     R$ (except number of
partner schools and
enrolled students)
          R$ (except number of partner schools and enrolled
students)
 

Number of partner schools

    n/a       3,400           2,323       622       1,965       616  

Number of enrolled students (in thousands)

    n/a       1,186.0           812.7       198.6       695.3       196.1  

Core content

    n/a       1,186.0           812.7       198.6       695.3       196.1  

Complementary education solutions

    n/a       133.6           120.2       —         115.2       —    

Average ticket per student per year

  US$ 92.9     R$ 483.0         R$ 486.3     R$ 516.5     R$ 491.0     R$ 496.0  

ACV Bookings (in millions)(5)

  US$ 110.2     R$ 572.8         R$ 395.2     R$ 102.6     R$ 341.4     R$ 97.2  

 

(1)

For convenience purposes only, amounts in reais as of December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

(2)

For the 2019 school year (which we define for purposes of ACV Bookings as the period starting in October 1, 2018 and ending in September 30, 2019).

(3)

For the 2018 school year (which we define for purposes of ACV Bookings as the period starting in October 1, 2017 and ending in September 30, 2018).

(4)

For the 2017 school year (which we define for purposes of ACV Bookings as the period starting in October 1, 2016 and ending in September 30, 2017).

(5)

We define ACV Bookings as the revenue we would expect to recognize from a partner school in each school year, based on the number of students who have contracted our services, or “enrolled students,” that will access our content at such partner school in such school year. ACV Bookings is a non-accounting managerial operating metric and is not prepared in accordance with IFRS. For more information about ACV Bookings, see “Presentation of Financial and Other Information—Special Note Regarding ACV Bookings.”



 

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RISK FACTORS

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

Certain Factors Relating to Our Business and Industry

Our operations and results may be negatively impacted by the COVID-19 pandemic.

Since December 2019, a novel strain of COVID-19 has spread in over 150 countries, including China, Italy, the U.S. and Brazil. In March 2020, the World Health Organization, revised the classification of COVID-19 from an epidemic (when a disease spreads through a specific community or region) to a pandemic, which according to the World Health Organization’s definition is when there is a worldwide spread of a new disease. The classification of the disease as a pandemic was motivated by the rapid increase in the number of cases and the number of affected countries on all continents, triggering measures by governments, companies and societies to contain the advances of COVID-19. The measures vary from country to country in quantity and degree of severity but basically involve, mandatory orders for social isolation and social distancing, restrictions on travel, closures of schools, restaurants, bars and shopping malls, restrictions on manufacturing and trade of non-essential goods and services, rationing of essential goods, cancellation of public events, and border closures, among other restrictive measures.

These measures have adversely impacted regional economies and have caused disruption of regional or global economic activity. In particular and in the interest of public health and safety, state and local governments in Brazil have required mandatory school closures, which may impact the number of schools and students that use our products, which could in turn adversely affect our operations and financial results. Additionally, these restrictive measures have resulted in a decrease in production of our learning materials, a temporary closure of our distribution centers (and reduced operations once re-opened), and the cessation of operation of certain transportation companies for undetermined periods, which may materially and adversely affect our operation and financial results. Moreover, such restrictive measures have also generated high levels of unemployment and have resulted in a decrease in incomes, which may affect enrollment levels at our client schools due to families’ ability to pay for private education. Despite the measures adopted to contain the progress of COVID-19 and aid measures announced by governments around the world, including the Brazilian government, as of the date hereof, we cannot predict the extent, duration and impacts of such containment measures, or the results of aid measures in Brazil.

Although we cannot predict the direct and indirect effects of the COVID-19 pandemic on our business, results of operations and financial condition, we may experience a decline in sales volumes of our products and services, a loss of clients, a decline in accounts receivable, and higher levels of impairment losses on trade receivables, or pressure from existing clients to reduce the prices of the solutions and materials we offer them. We may also experience a higher reuse rate and higher return rate of our textbooks and other learning materials.

 

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In addition, we may be requested to renegotiate rates for our services with clients who are already under contract with us, which could have an adverse effect on our ACV Bookings, or we may be required to reconfigure the delivery method for our learning materials (such as on-line only as compared to direct instruction from teachers in the classroom), which could adversely affect our revenues and costs. We may also postpone our plans to expand our operations through acquisitions and investments, or pursue our plan to develop and/or acquire new services and products in the near future, which could adversely affect our products and services portfolio. Other direct and indirect effects of the COVID-19 pandemic and governments’ responses to it on our business, results of operations and financial condition. Our business may continue to be impacted adversely even following a decrease in the spread of COVID-19 as a result of the lingering economic effects of the pandemic, including due to recession, a slowdown of the economy or increase in unemployment levels in Brazil, overall decrease of household income levels and bankruptcy of our partner schools. See “Summary—Recent Developments—COVID-19.”

In connection with social distancing and social isolation measures implemented by state and local governments in Brazil in response to the COVID-19 pandemic, and considering the effect of such measures on the education sector, certain of our partner schools experienced a decline in enrollment during the first half of the year, particularly in respect of early childhood education. Certain of our partner schools requested to decrease their level of purchases of educational materials and solutions we characterize as subscription arrangements for the second half of our 2020 sales cycle (which comprises the period between October 1, 2019 and September 30, 2020). On January 23, 2020, we had announced the result of ACV Bookings for the 2020 sales cycle (from October 2019 to September 2020), which reached R$716.0 million based on contracted amounts as of such date. This volume represented growth of 25% over the amount registered in the 2019 sales cycle. Notwithstanding such an increase, we believe that the revenue in the year 2020 to be derived from solutions we characterize as subscription arrangements will be adversely affected by such effects of declining enrollment at our partner schools.

The extent to which COVID-19 impacts our financial results and operations will depend on future developments, which are uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the impact of the COVID-19 pandemic. Based on future developments of COVID-19, it is possible that we may, in the future, be required to take actions or steps in relation to our business that could have a disruptive or a material and adverse effect on our business. We cannot guarantee that other regional and/or global outbreaks will not occur or that we would be able to mitigate the potential effects of any such outbreaks.

We face significant competition, the possibility of new competitors and potential substitutes for every product or service we offer and in each geographic region in which we operate. If we fail to compete efficiently, we may lose market share and our profitability may be adversely affected.

We compete with other educational platforms and suppliers of educational content. Our existing competitors and potential new competitors may offer similar or better educational solutions or substitutes in comparison to those we offer. In addition, existing and potential competitors may have access to more resources, be more prestigious or enjoy a better reputation in the academic community or may charge lower prices. To compete effectively we may be required to reduce the prices of our educational products and solutions, increase our operating expenses or look for new market opportunities to retain and/or attract new customers. As a result, our revenue and profitability may decrease. We cannot guarantee that we will be able to compete successfully with our current or future competitors. In addition, we have observed a trend of increasing consolidation in certain segments of the primary and secondary education markets in Brazil. If this trend intensifies (as has occurred in the higher education market in Brazil) we may face increasing competition in the markets in which we operate. If we are unable to maintain our competitive position or otherwise respond to competitive pressures effectively, we may lose our market share, our profits may decrease, and we may be adversely affected.

 

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We may not be able to update, improve or offer the content and products of our Core & EdTech Platform and Digital Platform efficiently, at an acceptable price and within the necessary timeframes.

Our Core & EdTech platform is intended to offer a complete package of educational solutions to address core curriculum requirements as well as complementary curricula such as English instruction and socio-emotional content, preparing students for entry into the most prestigious universities in Brazil and abroad, and offering a complete solution for personal and academic development. Our Digital Platform also offers our partner schools a suite of back office services. In order to differentiate ourselves from our competitors, we must constantly update our portfolio of products, services and solutions, including through the adoption of new technologies. We may not be able to adapt and update our products and services or develop new solutions quickly enough to provide our customers, their students and our students the solutions required by changing demands in the markets in which we operate. If we are unable to respond adequately to these demands due to financial restrictions, technological changes or other factors, our capacity to attract and retain customers and students may be adversely affected, damaging our reputation and our business.

We depend significantly on IT systems, and are subject to risks related to technological change. Any failure to maintain and support customer facing services, systems, and platforms, including addressing quality issues and executing timely release of new products and enhancements, could negatively impact our revenue and reputation.

IT systems are essential to our operations and growth as our content is available through an integrated online Content & EdTech platform and we depend on the uninterrupted function of our online platform to deliver our products and services. Our IT systems and tools may become obsolete or inadequate for delivering our Content & EdTech platform, whether due to rapidly evolving network protocols or new developments in network hardware, or we may face difficulty in staying abreast of and adapting to technological changes in the education sector.

We use complex proprietary IT systems and products, which our parent company shares with us, to support our business activities, including customer-facing systems, back-office processing and infrastructure. We also contract with datacenter service providers to host certain aspects of our platform and content. Our operations depend, in part, on the ability of our providers to protect their facilities against damage or interruption caused by natural disasters, power cuts, telecommunications breakdowns, criminal acts and similar events. Peak traffic, natural disasters, acts of terrorism, vandalism or sabotage, facility shutdowns on short notice, or other unforeseen problems relating to our service providers’ facilities, could result in prolonged interruptions in the availability of our platform, which could lead to customer dissatisfaction, damaging our reputation and our business.

Additionally, a failure to upgrade our technology, features, content, software systems, security infrastructure, network infrastructure, or other infrastructure associated with our platform could harm our business. Adverse consequences could include unanticipated disruptions, slower response times, bugs, degradation in levels of customer support, impaired quality of users’ experiences of our educational platform and delays in reporting accurate financial information.

In addition, we face risks associated with unauthorized access to our systems, including by hackers and due to failures of our electronic security measures. These unauthorized entries into our systems can result in the theft of proprietary or sensitive information or cause interruptions in the operation of our systems. As a result, we may be forced to incur considerable expenses to protect our systems from electronic security breaches and to mitigate our exposure to technological problems and interruptions. The theft of data from our customers may subject us to significant fines and penalties, adversely affecting our results of operations and damaging our reputation.

Our revenue depends on sales of educational content, products and services to our customers, and any setback in customer relations could cause us significant harm.

The success of our business depends on maintaining good customer relationship, developing new relationships and expanding our customer network, which includes private K-12 schools, their students and

 

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parents, among others. Any deterioration in customer relations, including due to early cancellation or non-renewal of agreements with our customers, could damage our reputation, adversely affect our ability to grow and significantly harm our business.

Our agreements with partner schools provide for fines and penalties in the event of early termination. However, there can be no assurance that such partner schools will pay such fines in the event of early termination and our customers may seek relief in court proceedings to contest the term of such agreements or the payment of such fines. We could also be forced to seek legal remedies in the event of early termination of our agreements in order to enforce the payment of such fines, though there can be no assurance that we would be successful in connection with any such legal proceedings, and we could incur significant costs attempting to enforce our rights. Such costs, considered in addition to the lost revenue from terminated contracts, could have an adverse effect on our results of operations.

We employ a customer support team to provide educational assistance and training for students and educators at our partner schools to help them maximize the results they obtain from using our Content & EdTech platform. Our customer support team must carry out frequent site visits in an effort to build positive relationships and strengthen our ties with our partner schools. In addition, our Livro Fácil e-commerce has its own customer service structure, which serves mostly families but is also integrated with the schools’ relationship centers. If we do not provide our customers with efficient and effective support, maintain appropriate customer satisfaction levels or hire personnel in number sufficient to address our customers’ needs, our ability to operate and expand our business could be adversely affected.

Our Content & EdTech Platform and Digital Platform are technologically complex, and potential defects in our platforms or in updates to our platforms can be difficult or even impossible to fix.

Our Content & EdTech Platform and Digital Platform are technically complex products, and, when first introduced to customers or when upgraded through new versions, may contain software or hardware defects that are difficult to be detected and corrected. The existence of defects and delays in correcting them can have adverse effects, such as, cancellation of contracts, delays in the receipt of payment, poor functioning of our platforms and their content, failure to acquire new customers, or misuse of our platforms by third parties.

We test new versions and upgrades to our Content & EdTech Platform and Digital Platform, but we cannot assure that all defects related to platform updates can be identified before, or even after a new version of our platforms are made available. The correction of defects can be time-consuming, expensive and difficult. Errors and security breaches of our products could expose us to product liability claims and damage our reputation, which could have an adverse effect on our business, financial condition and results of operations.

Our growth may have a negative effect on the successful expansion of our business, on our people management, and on the increase in complexity of our software and platforms.

We are currently experiencing a period of significant expansion and are facing a number of expansion related issues, such as the acquisition and retention of experienced and talented personnel, cash flow management, corporate culture and internal controls, among others. These issues and the significant amount of time spent on addressing them may result in the diversion of our management’s attention from other business issues and opportunities. In addition, we believe that our corporate culture and values are critical to our success, and we have invested a significant amount of time and resources building them. If we fail to preserve our corporate culture and values, our ability to recruit, retain and develop personnel and to effectively implement our strategic plans may be harmed.

We must constantly update our software and platforms, enhance and improve our billing and transaction and other business systems, and add and train new software designers and engineers, as well as other personnel to help us with the increased use of our platforms and the new solutions and features we regularly introduce. This

 

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process is time intensive and expensive and may lead to higher costs in the future. Furthermore, we may need to enter into relationships with various strategic partners, such as online service providers and other third parties necessary to our business. The increased complexity of managing multiple commercial relationships could lead to execution problems that can affect current and future revenue, and operating margins.

We cannot assure you that our current and planned platforms, systems, products, procedures and controls, personnel and third-party relationships will be adequate to support our future operations. In addition, our current expansion has placed a significant strain on management and on our operational and financial resources, and this strain is expected to continue. Our failure to manage growth effectively could harm our business, results of operations and financial condition.

Our business depends on the success of our brands and our ability to attract and retain customers could be adversely affected due to events or conditions that damage our reputation or the image of our brands.

We believe that market awareness of our brands has contributed significantly to the success of our business. Maintaining and enhancing our brands is crucial to our efforts to maintain and grow our customer network. We also depend significantly on the efforts of our sales force and our marketing channels, including online advertising, marketing research tools, social media and word of mouth. Failure to maintain and enhance our brand recognition could have a material adverse effect on our business, operating results and financial condition. We have devoted significant resources to our brand promotion efforts and to training our sales team in recent years, but we cannot assure you that these efforts will be successful. Our ability to attract new customers and retain our existing customers depends on our investments in our brands, on our marketing efforts and the success of our sales team, and the perceived value of our services in comparison with our competitors. If customers fail to distinguish our brands and the content we offer from our competitors, this may lead to decreased sales and revenue, lower margins or a decline in the market share of our brands. If our marketing initiatives are unsuccessful or become less effective, if we are unable to further enhance our brand recognition, if we incur excessive marketing and promotion expenses, or if our brand image is negatively impacted by any negative publicity, or if our customers misuse our brands in a way that results in a poor general perception of our brands, our business and results of operations could be materially and adversely affected.

Our business is subject to seasonal fluctuations, which may cause our operating results to vary from quarter-to-quarter and adversely impact our working capital and liquidity throughout the year, adversely affecting our business, financial condition and results of operations.

Our main deliveries of printed and digital materials to our customers occur in the last quarter of each year (typically in November and December), and in the first quarter of each subsequent year (typically in February and March), and revenue is recognized when the customers obtain control over the materials. In addition, the printed and digital materials we provide in the fourth quarter are used by our customers in the following school year and, therefore, our fourth quarter results reflect the growth in the number of our students from one school year to the next, leading to higher revenue in general in our fourth quarter compared with the preceding quarters in each year. Consequently, in aggregate, the seasonality of our revenues generally produces higher revenues in the first and fourth quarters of our fiscal year. In addition, we generally bill our customers during the first half of each school year (which starts in January), which generally results in a higher cash position in the first half of each year compared to the second half.

A significant part of our expenses is also seasonal. Due to the nature of our business cycle, we need significant working capital, typically in September or October of each year, in order to cover costs related to production and inventory accumulation, selling and marketing expenses, and delivery of our teaching materials at the end of each year in preparation for the beginning of each school year. As a result, these operating expenses are generally incurred between September and December of each year.

Accordingly, due to the timing of sales and delivery of our educational products, services and content, and the timing of university entrance exams, we expect that our revenue and operating results will continue to exhibit

 

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quarterly fluctuations. These seasonal fluctuations could result in volatility and adversely affect our liquidity and cash flows. As our business grows, these seasonal fluctuations may become more pronounced. As a result, we believe that sequential quarterly comparisons of our financial results may not provide an accurate assessment of our financial situation.

In addition, our cash flows are affected by our customer conversion rate, which is measured from the moment of first contact with a customer or when a customer enters our target list (that is, when our commercial team identifies contracts nearing termination or when customers raise complaints or dissatisfaction with their service level) until formalizing an agreement, which generally takes three to four months. As part of our sales efforts, we incur significant costs in an effort to maintain frequent and meaningful interactions with certain target customers, including through meetings dedicated to evaluating and testing our platform, promotional events for our target customers, distribution of product samples, guided tours of our business units, and exhibitions at industry fairs. These costs also generate quarterly fluctuations in our cash flows, which could result in annual volatility and have an adverse effect on our liquidity. As our business grows, or if our business were to stop growing or we lost customers, these fluctuations could become more pronounced.

Our working capital needs have increased and may well continue to increase as our business expands. If we do not increase our cash flow generation or gain access to additional capital, either through credit lines or other sources of capital, which may not be available on satisfactory terms or in adequate amounts, our cash and cash equivalents may decrease, which will have a negative impact on our liquidity and capital resources. In addition, if we do not have sufficient working capital, we may not be able to pursue our growth strategy, respond to competitive pressures or fund key strategic initiatives, which could harm our business, financial condition and results of operations.

We could be subject to risks related to inventory management.

We are exposed to significant inventory management risks, which could adversely affect our operating results due to, among other things: (1) seasonality; (2) launch of new products and services; (3) rapid changes in product cycles; (4) changes in consumer demand and consumption patterns; and (5) changes in consumer tastes. We may not forecast seasonality and product and consumer trends accurately in a manner to accurately manage our inventory needs, and demand for products could change significantly between the time we build our stock of inventory and the time we deliver our products.

In addition, when we start selling new products, we may not be able to establish favorable relationships with new suppliers, develop the right products or accurately forecast demand. The acquisition of certain types of inventory can be time-consuming and may require significant prepayments, which may not be refundable. Finally, we have a broad selection and high volume of inventory of certain products and we may not be able to sell sufficient quantities of these products. Our failure to adequately manage our inventory for any of the reasons mentioned above could adversely affect business and results of operations.

While our businesses are managed and financed independently from our parent company, we are party to a cost-sharing agreement for certain administrative expenses, and an increase in the amounts we pay to our parent company might be disproportional to the benefits we receive and could affect our performance. In addition, we share certain logistics-related expenses with our parent company, and the reimbursement to us by our parent company for such shared expenses may not be sufficient to meet our actual costs.

We are party to a cost-sharing agreement with our parent company for certain administrative expenses, such as those related to corporate, legal and accounting activities, which we refer to as overhead expenses. Under this cost-sharing agreement, we are required to pay our proportional share of overhead expenses based on our revenue as a share of the Cogna group’s aggregate revenue. Our parent company may incur increased overhead expenses in the course of its operations that cannot be allocated directly in a unique operation within the Cogna group and may not be directly related to our operations, whether due to increased acquisition activities, as part of corporate

 

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restructurings, or for operations generally, which would result in an increase in the overhead expenses we would be required to pay under the cost sharing agreement, and a corresponding increase in our general and administrative expenses, without corresponding benefits to our operations, which could have an adverse effect on our results of operations.

Moreover, we share certain logistics-related expenses with our parent company, and there may be cases in the future in which the reimbursement of such shared expenses that may be paid to us by our parent company may not be sufficient to cover expenses actually incurred by us in respect of logistics services benefitting our parent company, which would cause us to bear a disproportionate share of such expenses, thereby having an adverse effect on our business and results of operations.

Our activities will consist of a carve-out of the K-12 B2B businesses carried out by our parent company. If we fail to duly integrate such carved-out businesses, our business, financial condition and results of operations will be adversely affected.

Our parent company will contribute its K-12 B2B businesses, or the carved-out businesses, into us through a series of corporate acts and a corporate reorganization that will culminate in the Contribution. The carved-out businesses that are being contributed to us have, in certain instances, been operated historically as separate businesses and we may face challenges in integrating these businesses as a single operation, which could have an adverse effect on our financial condition and results of operations. As the operational integration of these separate businesses is ongoing, we may incur unexpected costs for integrating systems, people, distribution methods or operating procedures. We may face challenges in retaining key customers, or integrating executives and staff of the carved-out businesses. In particular, we may face challenges in implementing a uniform corporate culture across the carved-out businesses. Additionally, the integration of the carved-out businesses, as well as the potential tax benefits derived from the corporate reorganization, may be questioned and subject to scrutiny by Brazilian tax authorities and, therefore, we may be required to pay tax, fines and interests in arrears if such authorities deemed that such transactions triggered a taxable event. Any failure to successfully integrate the carved-out businesses as a single business operation, or any challenge to the expected tax benefits to be derived from the corporate reorganization could have an adverse effect on our business, financial condition and results of operations. As a result, our historical combined carve-out financial statements may not be indicative of our future performance and may not reflect what the consolidated results of operations, financial position and cash flows would have been had we operated as an independent entity during the periods presented.

Misuse of our brands or other actions carried out by other companies controlled by our parent company may damage our business and our reputation due to certain of our brands being shared with other businesses controlled by our parent company.

Several of our brands are shared between us, our parent company and other companies that are controlled by our parent company, which operate in different markets from ours (such as postsecondary education and the operation of certain other K-12 curriculum business separate from ours), and the misuse of these shared brands or actions taken by such companies could negatively affect our reputation, which could have an adverse effect on our business and results of operations. In November and December 2019, we entered into certain brand sharing agreements with our parent company, but these agreements may not assure uninterrupted and conflict-free use of our brands. If we lose the right to use these brands or become subject to restrictions in the use of our brands, our business and results of operations could be adversely affected. Some of the brands we will use in our business are owned by subsidiaries of our parent company, for which we will be granted a license to use pursuant to certain agreements. Nevertheless, such agreements may not ensure uninterrupted use of these brands and do not guarantee that we will not be subject to future conflict related to the use of these brands. Any conflict that arises out of the use of our brands could adversely affect our business and results of operations.

 

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Failure to protect or enforce our intellectual property and other proprietary rights could adversely affect our business and financial condition and results of operations.

We rely and expect to continue to rely on a combination of trademark, copyright, patent and trade secret protection laws, as well as confidentiality, intellectual property license and assignment agreements with our employees, consultants and third parties with whom we have relationships to protect our intellectual property and proprietary rights. As of the date of this prospectus, we did not have issued patents or patent applications pending in or outside Brazil. We are party to approximately 4,500 agreements with third party authors with respect to educational content. We own approximately 480 trademark registrations, including the trademarks and logos of “Vasta,” “Somos Educação,” “Editora Atica,” “Editora Scipione,” “Atual Editora,” “Sistema Anglo de Ensino,” “Par Plataforma Educacional,” “Sistema Maxi de Ensino,” “English Stars,” “Rede Cristã de Educação” and “MindMakers,” among others. We also have approximately 30 pending trademark applications in Brazil and three in the United States for trademarks “Vasta,” “Vasta Educação” and “Somos Educação,” and unregistered trademarks that we use to promote our brands. We also have the right to use trademark registrations for “Pitágoras” (owned by a subsidiary of our parent company) and “Saraiva” (owned by Saraiva Gestão de Marcas S.A., a company jointly owned by our parent company and third parties who are not controlled by us nor by our parent company). As of the date of this prospectus, we owned approximately 220 registered domain names in Brazil. From time to time, we expect to file additional copyright, trademark and domain names applications in Brazil and abroad. Nevertheless, these applications may not be approved or otherwise provide the full protection we seek. The dismissal of any of our trademark applications may impact our business. Third parties may challenge any copyrights, trademarks and other intellectual property and proprietary rights owned or held by us. Third parties may knowingly or unknowingly infringe, misappropriate or otherwise violate our copyrights, trademarks and other proprietary rights and we may not be able to prevent infringement, misappropriation or other violation without substantial expense to us.

Furthermore, we cannot guarantee that:

 

   

our intellectual property and proprietary rights will provide competitive advantages to us;

 

   

our competitors or others will not design projects based on our intellectual property or proprietary rights;

 

   

our ability to assert our intellectual property or proprietary rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties;

 

   

our intellectual property and proprietary rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak;

 

   

any of the patents, trademarks, copyrights, trade secrets or other intellectual property or proprietary rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned;

 

   

we will not lose the ability to assert our intellectual property or proprietary rights or to license our intellectual property or proprietary rights to others;

 

   

the texts and illustrations by third parties contained in the literary works that we sell have all been licensed and approved for use by us; or

 

   

we will not be adversely affected in case our parent company is subject to any liabilities related to literary works used in their other business and that are also used by us.

If we pursue litigation to assert our intellectual property or proprietary rights, an adverse decision in any of these legal actions could limit our ability to assert our intellectual property or proprietary rights, limit the value of our intellectual property or proprietary rights or otherwise negatively impact our business, financial condition and results of operations. If the protection of our intellectual property and proprietary rights is inadequate to prevent use or misappropriation by third parties, the value of our brands and other intangible assets may be

 

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diminished, competitors may be able to more effectively mimic our service and methods of operations, the perception of our business and service to customers and potential customers may become confused in the marketplace and our ability to attract and retain customers may be adversely affected.

We may in the future be subject to intellectual property claims, which are costly to defend and could harm our business, financial condition and operating results.

Because of the large number of authors that participate in our publications, from time to time, third parties may allege in the future that we or our business infringe, misappropriate or otherwise violate their intellectual property or proprietary rights, including with respect to our publications. We cannot guarantee that we are party to enforceable agreements with all the counterparties that have purportedly assigned copyrights or other intellectual property rights to us, in which case we could be subject to legal proceedings and the payment of significant fines for unauthorized use of intellectual property. In addition, many companies, including various “non-practicing entities” or “patent trolls,” are devoting significant resources to developing or acquiring patents that could potentially affect many aspects of our business. There are numerous patents that broadly claim means and methods of conducting business on the Internet. We have not exhaustively searched patents related to our technology. In addition, the publishing industry has been, and we expect in the future will continue to be, the target of counterfeiting and piracy. We may implement measures in an effort to protect against these potential liabilities that could require us to spend substantial resources. Any costs incurred as a result of liability or asserted liability relating to sales of unauthorized or counterfeit educational materials could harm our business, reputation and financial condition.

Third parties may initiate litigation against us without warning. Others may send us letters or other communications that make allegations without initiating litigation. We may elect not to respond to the communication if we believe it is without merit or we may attempt to resolve disputes out of court by electing to pay royalties or other fees for licenses or out-of-court settlements in unforeseeable amounts. If we are forced to defend ourselves against intellectual property claims, whether they are with or without merit or are determined in our favor, we may face costly litigation, diversion of technical and management personnel, inability to use our current website or inability to market our service or merchandise our products. As a result of a dispute, we may have to develop non infringing technology, including partially or fully revise any publication that infringes intellectual property rights, enter into licensing agreements, adjust our merchandising or marketing activities or take other actions to resolve the claims. These actions, if required, may be unavailable on terms acceptable to us or may be costly or unavailable. If we are unable to obtain sufficient rights or develop non infringing intellectual property or otherwise alter our business practices, as appropriate, on a timely basis, our reputation or our brands, our business and our competitive position may be affected adversely and we may be subject to an injunction or be required to pay or incur substantial damages and/or fees and/or royalties.

Most of our services are provided using proprietary software and our software is mainly developed by our employees, who do not specifically assign to us their copyrights over the software and we are unable to assure that we have adequate agreements with all of our employees to provide for the assignment of software rights. While applicable law establishes that employers shall have full title over rights relating to software developed by their employees, we could be subject to lawsuits by former employees claiming ownership of such software. As a result, we may be required to obtain licenses of such software, incurring costs relating to payments of royalties and/or damages and we may be forced to cease the use of such software. If we are unable to use certain of our proprietary software as a result of any of the foregoing or otherwise, this could have a material adverse effect on our business, financial condition and results of operations.

In addition, we use open source software in connection with certain of our products and services. Companies that incorporate open source software into their products have, from time to time, faced claims challenging the ownership of open source software and/or compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who

 

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distribute or use open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. Any requirement to disclose our proprietary source code or pay damages for breach of contract could have a material adverse effect on our business, financial condition and results of operations.

The quality of the teaching content we deliver to our customers depends to a significant degree on the quality of our publishers and of the content we purchase. Any issues related to obtaining this content or regarding the quality of this content may have an adverse effect on our business.

The educational content and materials we provide are a combination of content developed by our in-house production team and content purchased from certain independent authors and publishers with whom we have contractual relationships. However, we may not be able to maintain our contractual relationships with independent authors or publishers if, for instance, (1) such authors leave us to join our competitors; (2) they no longer accept our contractual conditions, particularly those in relation to copyright; or (3) they choose to publish their content independently. If we are not able to replace such authors or publishers or if we are unable to renew the agreements that we currently have with them on terms that are favorable to us, our business could be adversely affected. In addition, delays in the delivery of content from authors may have an impact on our annual content creation schedule.

A lack of publishers, qualified employees, independent authors or satisfactory purchased content, or any decrease in the quality of the content produced or purchased, whether actual or perceived, or any significant increase in the cost of hiring or retaining qualified personnel or of acquiring content from independent authors or publishers, would have a material adverse effect on our business, financial condition and results of operations.

Additionally, our content production process requires significant coordination between different teams, as well as qualified personnel with appropriate training in order to ensure that we maintain the quality of our educational content and that we are able to successfully implement additional functions and technology delivery. We may not be able to retain, recruit or train qualified employees or obtain educational content that meets our standards, which could have an adverse effect on our business and results of operations.

If our partner schools are unable to maintain educational quality, we may be adversely affected.

Our partner schools and their students are regularly assessed and classified under the terms of applicable educational laws and regulations. If the schools, programs or students from our partner schools receive lower scores from year to year on any of their assessments, including on the Index for Development in Primary and Secondary Education (Índice de Desenvolvimento da Educação Básica), or IDEB, and on the ENEM or if there is any drop in the acceptance rates of the students from our partner schools into prestigious universities, we may be negatively affected by perceptions of a decline in the educational quality of our Content & EdTech platform, which could adversely affect our reputation and, as a result, our operating results and financial condition.

A significant increase in late payment and/or default in the payment of amounts due to us by our customers and a significant increase in attrition rates of students among our customers may adversely affect our revenue and cash flow.

Our customers may face financial difficulties and, in certain cases, insolvency or bankruptcy. A decrease in our customers’ revenues (due to a decline in enrollment as a result of a decrease in disposable income of families enrolled at our partner schools) could have an adverse effect on the ability of our existing and prospective customers to pay our tuition fees and/or trigger an increase in attrition rates. A significant increase in late payment or default by our customers could have a material adverse effect on our revenue and cash flow, thereby affecting our ability to meet our obligations. As of March 31, 2020, our impairment losses on trade receivables was R$33,332 thousand, an increase of R$10,808 thousand from R$22,524 thousand in December 31, 2019. Our impairment losses on trade receivables as of December 31, 2019 increased R$3,127 thousand from

 

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R$19,397 thousand as of December 31, 2018. Our impairment losses on trade receivables as of December 31, 2018, decreased R$219 thousand from R$19,178 thousand as of December 31, 2017. Our impairment losses on trade receivables as of December 31, 2019, 2018 and 2017 represented 2.28%, 2.29% and 2.44% of our net revenue from sales and services as of each period-end, respectively. An increase in the rate of impairment losses, or other defaults by our customers, could have an adverse effect on our business and financial condition.

In addition, any increase in the student attrition rates among our customers could have an adverse effect on our operating results. We believe the attrition rate among our customers is mainly related to the educational quality, school environment, financial situation of their current and prospective students and socio-economic conditions in Brazil. Any significant changes in our projected student attrition rate and/or in failure to re-enroll students may affect our partner schools’ enrollment figures, as well as their ability to recruit and enroll new students, which could have a material adverse effect on our projected revenue and operating results.

In addition, part of our revenue has come from the sale of education solutions to municipal governments within several states of Brazil, and such public entities may delay payments or even default in payment. Any such payment delay or default would result in further delays in our receipt of payment, as we would be required to seek a special judicial order (precatórios) under Brazilian law to enforce our rights to receive payment. This special judicial order is a formalization of a payment due by the Brazilian Public Treasury issued as a consequence of a final or nonappealable judicial decision. Furthermore, enforcement for the collection of debts due by the Public Treasury are not processed by the attachment of assets owned by the public entities, but by the issuance of a payment order for the inclusion of the debt in the public budget, further delaying the timing of any payment. Late payments or defaults by such public entities could have a material adverse effect on our revenue and cash flow.

If our growth rate decelerates significantly, our future prospects and financial results would be adversely affected, preventing us from achieving profitability.

We believe that our growth depends on a number of factors, including, but not limited to, our ability to:

 

   

increase the number of users of our products and services;

 

   

continue to introduce our products and services to new markets;

 

   

provide high quality support to students and partner schools using our products and services;

 

   

expand our business and increase our market share;

 

   

compete with the products, services, offers, prices and incentives offered by our competitors;

 

   

develop new products, services, offerings and technologies;

 

   

identify and acquire or invest in businesses, products, offerings or technologies that we believe may be able to complement or expand our platform; and

 

   

increase the positive perception of our brands.

We may not be successful in achieving the above objectives. Any slowdown in the demand from students, partner schools or customers for our products and services caused by changes in customer preferences, failure to maintain our brands, inability to expand our portfolio of products or services, changes in the Brazilian or global economy, taxes, competition or other factors may lead to a decrease in revenue or growth and our financial results and future prospects could be negatively affected. We expect that we will continue to incur significant expenses as a result of our efforts to continue growing, and if we cannot increase our revenue at a faster rate than the increase in our expenses, we will not be able to achieve profitability.

 

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We may be subject to penalties under Law 12.846/2013 or the Brazilian Anti-Corruption Law, the Federal Administrative Procedural Law, the Administrative Improbity Law and the U.S. Foreign Corrupt Practices Act, the FCPA, if our employees engage in any conduct prohibited by these laws.

We have in the past engaged in, and continue to maintain, relationships with a number of public entities, both through contracts and public tenders, including under the PNLD (in which Vasta no longer participates, as this operation is now carried out through another subsidiary of our parent company), through the provision of services and the sale of products, solutions and educational content to public entities (including in connection with the sale of educational content to public entities and to the Industry Social Service (Serviço Social da Indústria), or SESI, and for the purpose of obtaining licenses and permits required for our operations (such as operating permits, fire inspections and education sector regulatory licenses, among others). We train our employees to comply with the rules set forth in the code of conduct and anti-corruption manual of our parent company, which set out policies and rules for proper dealings with public officials for purposes of our compliance with the Brazilian Anti-Corruption Law, the Federal Administrative Procedural Law, the Administrative Improbity Law and the FCPA. However, there can be no assurance that all of our employees and agents acting on our behalf who may have contact with public officials will fully comply with our policies, or that our policies will be fully effective in preventing non-compliance with applicable law, which could lead to our failure to comply with the Brazilian Anti-Corruption Law, the Federal Administrative Procedural Law, the Administrative Improbity Law or the FCPA. Any conduct by our employees or agents with public officials in any manner that fails to comply with our parent company’s code of conduct, the anti-corruption manual, the Brazilian Anti-Corruption Law, the Federal Administrative Procedural Law, the Administrative Improbity Law and the FCPA could lead to government investigations, judicial and/or administrative proceedings, fines, penalties, loss of regulatory licenses, disgorgement of profits, loss of tax benefits and damage to our reputation and image, any of which would have an adverse effect on our business, financial condition and results of operations.

Certain students enrolled at our partner schools may not generate meaningful revenue because of the reutilization of printed teaching materials.

In recent years, we have seen a growing increase in the reuse of printed teaching materials by families who use the same printed material for more than one child, even though we update these materials annually, which has an adverse effect on our revenue. We call this phenomenon “sales drop” or “reuse.” Because the reuse of materials results from family behavior combined with the list of materials adopted by our partner schools, we are unable to control or mitigate the sales drop effect. We cannot predict any future sales drop or its potential impact on our revenue and operating results.

The Saraiva brand is owned by Saraiva Gestão de Marcas S.A., a company that is jointly owned by our parent company and third parties that are not part of the Cogna group. Any conflict with these parties could have a negative effect on our business.

We have the right to use the Saraiva brand until December 28, 2040 for some of Vasta’s textbooks and literary works, in the context of our publishing operations. The Saraiva brand accounted for 25%, 24% and 19% of the net revenue from sales and services of our textbook revenues in 2019, 2018 and 2017, respectively. In terms of net revenue from sales and services, the Saraiva brand accounted for 7% in each of 2019, 2018 and 2017, respectively. Saraiva Gestão de Marcas S.A. is jointly owned by our parent company and third parties who are not controlled by us or our parent company. These parties may have interests that conflict with ours, which might lead to disputes that could adversely affect our ability to use the Saraiva brand. We cannot assure that these parties’ interests will align with ours or that our interests would prevail in any dispute regarding the use of the Saraiva brand. This potential conflict of interest could adversely affect the reputation or performance of the Saraiva brand, or our ability to use the Saraiva brand, which could have an adverse effect on our results of operations. In addition, the third party who jointly owns Saraiva Gestão de Marcas S.A., is currently subject to a bankruptcy proceeding in Brazilian courts. We cannot guarantee that there will not be any impact on the Saraiva brand in the course of this proceeding or if this party were subject to liquidation.

 

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Changes in our or our customers’ current regulatory environment could have an adverse effect on us.

Currently, although we are subject to the requirements of the National Common Curriculum Base (Base Nacional Comum Curricular), or BNCC, we are not directly regulated by the Brazilian Ministry of Education (Ministério da Educação), or MEC, nor are we subject to any governmental regulations imposed by the National Education Council (Conselho Nacional de Educação), or CNE, or by the Board of Primary and Secondary Education (Conselho de Educação Básica), or CEB. We are also subject to certain regulations related to bidding processes in connection with the sale of educational content to public entities, such as the bidding law (Lei de Licitações) and the Federal Administrative Procedural Law (Lei de Processo Administrativo Federal). In addition, we are subject to bidding regulations enacted by SESI, in connection with the sale of educational content to the SESI. If we or our customers become subject to new laws and regulations, we may incur additional costs in order to comply with the new legislation and this may have an adverse impact on our business. In addition, if we are required to comply with additional laws and regulations, there is a risk that we may not do so fully or satisfactorily, and this could result in possible legal or administrative proceedings against us, which could have a material adverse effect on our reputation, our business and results of operations.

We use third party service providers in our logistics services to ship all of our collections of printed teaching materials and a failure by our service providers to perform efficiently would have an adverse effect on our business, financial condition and results of operations.

Our delivery of printed books and other educational content to schools is a seasonal activity, with a cycle that usually begins with the creation and review of content from April to July, the purchase of printing services from August to October, and physical delivery of printed books from November to January. We have expanded our operations rapidly since we first began our activities. As our size increases, so does the size and complexity of our logistics operation.

We generally require a high volume of deliveries in November and December, which requires a significant degree of inventory, supply management and management of our relationship and coordination with printers. Our customers place key value on the timely delivery of printed materials. Consequently, failure to comply with deadlines, inadequate logistics planning, disruption at distribution centers, poor inventory management, and the failure to meet customer expectations, launch new products, or respond to rapidly changing customer preferences, could have an adverse effect on our reputation, increase returns of our materials or cause inventory losses and adversely affect our business, results of operations and financial condition.

Virtually our entire inventory of our printed teaching materials is stored in rented warehouse facilities operated by us and delivered by third party carriers that undertake the distribution of all physical teaching materials. If our logistics service providers do not fulfill their obligations to deliver teaching materials to our customers in a timely manner, or if a significant number of deliveries are incomplete or contain assembly errors, our business, operating results and operations could be adversely affected. In addition, natural disasters, fires, power outages, work stoppages or other unexpected catastrophic events, particularly during the period between August and October, when we expect to receive most of the instructional materials for the school year and we have not yet delivered these materials to our customers, could significantly disrupt our ability to deliver our products and operate our business. If we were to lose a significant portion of our inventory, or if our warehouse facilities or distribution centers suffer any significant damage, we could fail to meet our delivery obligations and our business, financial condition and results of operations would be adversely affected.

We have a significant amount of debt and may incur additional debt in the future. Our payment obligations under our debt may limit our available resources and the terms of debt instruments may limit our flexibility in operating our business.

As of March 31, 2020, we had total outstanding bonds and financing of R$ 1,647.0 million compared to R$1,640.9 million as of December 31, 2019, mostly comprised of private debentures issued by Somos Sistemas

 

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to Saber and Cogna (as creditors) bearing interest at an average annual rate of CDI plus 1.15%, with semi-annual coupon payments and a bullet repayment at maturity in August 2023. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.” As of the date of this prospectus, we expect our debt service obligations for the remainder of 2020 to amount to R$451 million. Most of our indebtedness is linked to the CDI. Changes in Brazilian macroeconomic conditions can adversely affect the CDI. Fluctuations in the inflation rate and rate indices can increase the cost of our indebtedness that is linked to the CDI and may have a material adverse effect on our financial position and result of operations. Subject to the limitations under the terms of our existing debt, we may incur additional debt, secure existing or future debt or refinance our debt. In particular, we may need to incur additional debt to fund our activities, and the terms of this financing may not be attractive for us.

We may be required to use a substantial portion of our cash flows to pay the principal and interest on our indebtedness. These payments will reduce the funds available for working capital, capital expenditures and other corporate purposes and will limit our ability to obtain additional financing for working capital or making capital expenditures for expansion plans and other investments, which may in turn limit our ability to implement our business strategy. Our significant debt may also increase our vulnerability to downturns in our business, in our industry or in the economy as a whole and may limit our flexibility in terms of planning or reacting to changes in our business and in the industry and could prevent us from taking advantage of business opportunities as they arise. We cannot guarantee that our business will generate sufficient cash flow from operations or that future financing will be available in sufficient amounts or on favorable terms to enable us to make timely and necessary payments under the terms of our indebtedness or to fund our activities.

In addition, the terms of certain of our debt facilities subject us to certain limitations in the operation of our business, due to restrictions on incurring additional debt and encumbrances, carrying out corporate reorganizations, selling assets, paying dividends or making other distributions. For example, on December 31, 2019, we incurred additional outstanding debt in the amount of R$1.5 billion upon the contribution to Vasta by Cogna of outstanding private debentures originally issued by Saber and owed to Cogna, pursuant to which we agreed until the maturity of such private debentures that: (1) we will allocate at least 50% of the use of proceeds from any liquidity event (including the proceeds from this offering) to repay such debentures; (2) we will not obtain any new loans unless the proceeds of such loan are directed to repay our debentures with Cogna; and (3) we will not pledge shares and/or dividends. Any debt that we incur or guarantee in the future could be subject to additional covenants that could make it difficult to pursue our business strategy, including through potential acquisitions or divestitures.

In addition, if we were to default on any of our debt, we could be required to make immediate repayment, other debt facilities may be cross-defaulted or accelerated, and we may be unable to refinance our debt on favorable terms or at all, which would have a material adverse effect on our financial position. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness” for a summary of the conditions that could result in an acceleration of our indebtedness.

Our ability to utilize certain tax credits may be limited.

As of March 31, 2020, we had accumulated tax losses of R$177.2 million which are available as offsetting credits against future taxable profits compared to R$108.0 million as of December 31, 2019. Our ability to use these accumulated tax losses as offsetting credits depends on our future taxable income, which could have a material adverse effect on our operating results. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies.”

 

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PAR, or Partnership (Parceria), is part of our business model, and is focused on long-term agreements through the use of textbooks rather than learning systems. If we are not able to implement this product successfully, our business would be materially adversely affected.

PAR, which is focused on long-term agreements using textbooks, is a new product designed to bring the same level of profitability and loyalty as our learning systems. In 2019, 2018 and 2017, revenues from PAR contracts accounted for 13.4%, 9.8% and 5.2%, respectively, of our total ACV Bookings (subscription business). In order for us to increase PAR’s profitability in line with that of our learning systems, we must increase the number of contracts for textbook sales with schools and families by providing a product offering that is economically attractive to schools and families, seeking to reduce or eliminate the reuse of printed teaching materials. At present, around 90% of PAR contracts remain as adhesion contracts, in which sales are not made directly to partner schools and families, which means the schools and families purchase printed teaching materials through a number of channels, including distributors, bookstores and third-party e-commerce, as well as reuse materials in many cases. In case we are not able to establish a specific stock keeping unit and, therefore, not able to guarantee that our PAR-related materials are exclusively sold directly from our partner schools or from us, we may be exposed to partial revenue loss as a result of the reuse of printed materials sold in previous cycles (secondary market). Currently, our estimated revenue from PAR contracts already takes into account the average market reuse of printed materials, which assumes students can buy the material through other channels and the historical reuse of printed materials. An increase in the sales of reused printed materials may intensify the negative impacts on our revenues. We estimate that an inability to maintain exclusive control over PAR-related materials represents foregone revenue of approximately R$0.50 for every R$1.00 in PAR-related products expected to be sold, based on the contribution we estimate from Vasta’s publishing operations. Effectively, new sales are reduced due to the reuse of books such that, for each 100 students that adopt PAR-related material, 53 students purchase a new book and 47 students reuse old material. This effect has had, and is expected to continue to have, an adverse effect on our revenue and results of operations. We account for this effect in our estimates and forecasts for PAR-related revenues.

Our results may be negatively affected by the return rates on our textbooks.

To increase the availability of our textbooks for purchase by schools and students, our textbook sales (both through PAR and as spot sales) are carried out through numerous channels, such as bookstores, schools, large retailers, distributors and e-commerce sellers. Each of these distribution channels has a unique return policy, which can result in returns ranging from 10% to 50% of the total purchased amount during a given sales cycle. Our textbook sales are concentrated during the period from November to March. From April to June, the sales channels can return any unsold inventory to us. We are unable to assure that future return rates will be consistent with historical return rates. An increase in the volume of returns in excess of our expectations could have an adverse effect on our results of operation and financial condition.

We may not be successful in implementing our cross-selling and up-selling strategy with our current base of partner schools.

Part of our growth strategy consists of increasing the number of segments in which we operate in our partner schools, for example by expanding our services and educational solutions for elementary school and kindergarten to schools that only purchase our solutions for high school (up-sell). We also seek to expand the uptake by our partner schools of our supplementary courses, such as English language instruction or solutions for socio-emotional instruction (cross-sell). If we are unable to effectively sell these additional course offerings to our existing partner schools, for instance because of other competitors already entrenched with the school, we may not be able to grow our business at our projected rates, which could have an adverse effect on our business, financial condition and results of operations.

 

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We may be unable to convert spot market book sales into long-term contracts, either through the adoption of our learning systems or PAR solutions, which could have an adverse effect on our future growth.

Traditionally, certain schools with which we have done business choose to buy only selected books from us in the “spot book market.” These schools do not have long term contracts with us, and we are unable to predict how their spot purchases will impact our revenue. Part of our growth strategy is based on converting spot book market sales into long-term contracts by having the relevant school adopt one of our learning systems or PAR. If we are unable to convert spot market sales into long-term contracts, we may not meet our growth targets, which could have an adverse effect on our prospects, our revenue and cash flow.

Part of our strategy is based on entering new markets and implementing new businesses, including solutions through our Digital Platform. We may not be successful in exploiting these opportunities, which may have an adverse effect on our business.

Many of the markets where we plan to operate, such as academic and financial ERP and student acquisition solutions, are new to us and our organizational skills in these markets have not yet been tested. In addition, we may have incorrectly estimated the total size of new markets or our ability to penetrate such markets or engage in new businesses, such as increased offering of solutions through our Digital Platform. In addition, we may face competition from existing participants or new entrants in the market in which our Digital Platform operates, including in the digital school office, digital marketing and family relations services, and our competitors may have greater resources than we do or may offer more attractive products or services. If we are unsuccessful in entering new markets or in implementing new businesses, we may incur costs that we are unable to recoup and our image and reputation may be adversely affected, which could have an adverse effect on our results of operation and financial position.

We may not be able to expand our complementary education portfolio in line with our business strategy.

We currently have educational solutions for English instruction and the teaching of socio-emotional skills, which can be offered during normal school hours or after school. We plan to develop and/or acquire new services and products to expand our portfolio of these complementary education solution. We may not be able to develop products and solutions in an effective way, they may not be accepted by our customers and by the market, or we may not develop the internal capabilities to produce such products and services. Additionally, we may not be able to acquire companies operating such new services and businesses on favorable terms, or we may incur risks of integrating acquired assets. If we are unable to expand our complementary education solution due to any of the foregoing factors, our business, financial condition and results of operations could be adversely affected.

Price increases and changing business conditions for the purchase of paper, a global commodity, may have a significant impact on us due to our reliance on a high volume of printed materials.

Paper prices and postage rates are difficult to predict and control. Paper is a commodity and its price may be influenced by fluctuations in exchange rates and commodity prices and may be subject to significant volatility. Our third-party printing service providers may adjust their rates to account for any changes in paper prices, and although historically we have been able to obtain favorable pricing as a result of volume discounts, particularly after our significant recent growth, there is no assurance that we will continue to obtain favorable prices in the future. We cannot predict with certainty the magnitude of future price changes for paper, postage and printing and publishing in general, and we may not be able to pass these increases on to our customers, which may have an adverse effect on our business and results of operations, given the importance of paper suppliers to our business. Additionally, we could be materially affected as a result of any contractual or legal issue with our paper suppliers or any delay in the delivery of our printed books and other educational content to partner schools, which could cause schools to delay payments due to us, or lead schools to terminate their contract with us, which would have an adverse effect on our business and results of operations.

 

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There is no assurance that our partner schools will honor their contractual obligations, or that the number of students actually enrolled at partner schools corresponds to the number of students reported by the schools.

We generally enter into agreements with the schools that subscribe to our content and services, however, partner schools may try to avoid their obligations under their agreements with us, even with an effective contract in place, and we may be subject to additional costs and expenses in an effort to enforce our rights, which would have an adverse effect on our business and financial condition.

In addition, when partner schools enter into agreements with us, they report to us the number of students enrolled at their school who will use our products and services. However, we cannot assure you that the number of students reported by a specific partner school in a specific segment is the actual number of students enrolled, as we do not audit this number, and our expected revenue may be adversely affected by inaccurate reporting, which could have a material adverse effect on us, our reputation and results of operation.

The printing market is heavily concentrated, and increases in rates, changes in business conditions, or any disruptions to the service of our third-party printing service providers could significantly affect us.

Our production of printed learning materials is outsourced to printers with whom we have contracts. We are subject to delays in the graphic production of our material, errors in production or even the bankruptcy of our partner printing companies, which could cause damage to our image with our customers and to our operating results.

In addition, increases in the rates of the third-party printing service providers that produce our printed educational materials could have a negative impact on our results if we are unable to fully pass on these cost increases to our customers. Finally, the printing market is a heavily concentrated one, which may reduce our bargaining power and result in less favorable rates, with an adverse effect on our business.

We may fail to meet our publicly announced quarterly and annual financial guidance, which would cause the price of our Class A common shares to decline in value and our shareholders’ equity to be adversely affected.

Following this offering, we expect that our management will publicly announce quarterly and annual guidance related to our operating and financial results, and cash generation estimates based on management’s expectations and assumptions. We cannot guarantee that we will meet our publicly announced quarterly or annual estimates, and our operating and financial results and cash generation in any one quarter should not be relied upon as indicative of our future performance. Our ability to meet our estimates may be affected by certain factors, including: (1) poor business performance due to flaws in our information technology, our operations or management; (2) competition from existing and future competitors that operate in the same segments in which we operate and that may offer technological solutions, products and/or services that are more attractive than ours; (3) the absence of qualified professionals to execute our strategies in the short, medium and long term; and (4) other risks to which we are exposed to, as disclosed elsewhere in this prospectus. If our actual operating, financial and cash generation results fail to meet our public guidance, the price of our Class A common shares could decline in value and our shareholders’ equity may be adversely affected.

We depend on our subsidiaries’ financial results, and we may be adversely affected if the performance of our subsidiaries is not positive or if Brazil imposes legal restrictions on, or imposes taxes on, the distribution of dividends by subsidiaries.

We are a pure holding company and our activities are carried out by our subsidiaries. Our material assets are our direct and indirect equity interests in our subsidiaries. We are, therefore, dependent upon payments, dividends and distributions from our subsidiaries for funds to pay our holding company’s operating and other

 

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expenses, to comply with our financial obligations and to potentially pay future cash dividends or distributions, if any, to holders of our Class A common shares. The amount of any dividends or distributions which may be paid to us from time to time will depend on many factors including, for example, such subsidiaries’ results of operations and financial condition; limits on dividends under applicable law; their constitutional documents; documents governing any indebtedness; applicability of tax treaties; and other factors which may be outside our control. Furthermore, exchange rate fluctuation will affect the U.S. dollar value of any distributions our subsidiaries (which are mostly located in Brazil) make with respect to our equity interests in those subsidiaries. See “—Risks Relating to Brazil—Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our Class A common shares,” and “The ongoing economic uncertainty and political instability in Brazil may harm us and the price of our Class A common shares.” There is no guarantee that the cash flow and profits of our controlled companies will be sufficient for us to comply with our financial obligations and pay dividends or interest on shareholders’ equity to our shareholders, or that the Brazilian federal government will not impose legal restrictions on, or impose taxes on, the distribution of dividends by our subsidiaries.

Any change in the tax treatment of our business or the loss or reduction in tax benefits on the sale of books (including digital books and e-readers) could materially adversely affect us.

We benefit from tax Law No. 10,865/04, as amended by Law No. 11,033/04, which provide that our tax rate on the sale of books is zero in respect of contributions to the social integration program tax (Programa de Integração Social, or PIS) and the social contributions on revenue tax (Contribuição para o Financiamento da Seguridade Social, or COFINS). The sale of books is also exempt by the Brazilian constitution from Brazilian municipal taxes, Brazilian services tax (Imposto Sobre Serviços, or ISS) and from the Brazilian tax on the circulation of goods, interstate and intercity transportation and communication services (Imposto sobre Operações relativas à Circulação de Mercadorias e sobre Prestações de Services de Transporte Interestadual e Intermunicipal e de Comunicação, or ICMS). If the Brazilian federal or state governments or any Brazilian municipality or tax authority decides to change or review the tax treatment of our activities, or cancel or reduce the tax benefits applicable to the sale of our products (including digital books and e-readers) and/or challenge such treatment, and we are unable to pass any corresponding cost increase onto our customers, our results of operations could be materially adversely affected. Tax exemptions available to physical books have been extended to digital books based on a decision by the Brazilian Supreme Court issued on March 8, 2017. However, there is no assurance that the Brazilian Supreme Court will not change its position in the future in regard to the taxation of digital books, which could have a material adverse effect on our business and results of operations.

We may pursue strategic acquisitions or investments. The failure of an acquisition or investment to be completed or to produce the anticipated results, or the inability to fully integrate an acquired company, could harm our business.

We may from time to time, as opportunities arise or economic conditions permit, acquire or invest in complementary companies or businesses as part of our strategy to expand our operations, including through acquisitions or investments that may be material in size and/or of strategic relevance. The success of an acquisition or investment will depend on our ability to make accurate assumptions regarding the valuation, operations, growth potential, integration and other factors related to that business. We cannot assure you that our acquisitions or investments will produce the results that we expect at the time we enter into or complete a given transaction.

Any acquisition or investment involves a series of risks and challenges that could adversely affect our business, including due to a failure of such acquisition to contribute to our commercial strategy or improve our image. We may be unable to generate the expected returns and synergies on our investments. In addition, the amortization of acquired intangible assets could decrease our net profit and potential dividends. We may face challenges in integrating acquired companies, which may result in the diversion of our capital and our management’s attention from other business issues and opportunities. We may be unable to create and implement

 

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uniform and effective controls, procedures and policies, and we may incur increased costs for integrating systems, people, distribution methods or operating procedures. We may also be unable to integrate technologies of acquired businesses or retain key customers, executives and staff of the businesses acquired. In particular, we may face challenges in integrating staff working across different geographies and that may be accustomed to different corporate cultures, which would result in strained relations among existing and new personnel. We could also face challenges in negotiating favorable collective bargaining agreements with unions due to differences in the negotiating procedures used in different regions. Finally, we may pursue acquisitions where we acquire a majority stake in such acquisition, but with significant minority investors, or we may become minority investors in certain operations, wherein our ability to effectively control and manage the business may be limited. If we are unable to manage growth through acquisitions, our business and financial condition could be materially adversely affected.

We may also require approval from Brazil’s Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica), or CADE, or other regulatory authorities, in order to conduct certain acquisitions or investments for education companies exceeding annual gross revenue of R$75 million. CADE may not approve our future acquisitions or may condition approval of our acquisitions on our disposal of certain operations of our targeted acquisitions or could impose other restrictions on the operations and business of the target. Failure to obtain approval from CADE or other regulatory authorities for future acquisitions, or any conditional approvals of future acquisitions, may result in expenses that could adversely affect our results of operations and financial condition.

In addition, in connection with any future acquisition, we may face liabilities for contingencies related to, among others, (1) legal and/or administrative proceedings of the acquired company, including civil, regulatory, labor, tax, social security, environmental and intellectual property proceedings, and (2) financial, reputational and technical problems including those related to accounting practices, disclosures in financial statements and internal controls, as well as other regulatory issues. These contingencies may not have been identified prior to the acquisition and may not be sufficiently indemnifiable under the terms of the relevant acquisition agreement, which could have an adverse effect on our business and financial condition. Even if contingencies are indemnifiable under the relevant acquisition agreement, the agreed levels of indemnity may not be sufficient to cover actual contingencies as they materialize.

We may not be able to effectively implement our sales, marketing and advertising programs to attract and retain new customers.

In order to maintain and increase our revenue and margins, we need to continue to retain and attract new customers by means of the sales, marketing and advertising campaigns. A number of factors could adversely impact our ability to successfully implement our marketing campaigns, such as an inability of our sales team to effectively interact with potential clients, or potential clients do not find our products and services sufficient to meet their needs. If we are unable to successfully market our educational products and solutions, whether due to defects in our marketing tools and/or failure to adjust our strategy in order to meet the needs of current and potential customers, our ability to retain and attract new customers may be undermined, which would adversely affect our business and results of operations.

If we are unable to retain or replace our key personnel or are unable to attract, retain and develop other qualified employees, our business, financial situation and operating results may be adversely affected.

Part of our future success depends on the ability and efforts of a number of our key employees who have significant experience in our operations. Many of our key employees have been working for us over an extended period or have been specifically recruited by us on account of their experience and expertise in the sector. The loss of key personnel, including senior executives, members of the executive board, board members, key officers and managers, among others, and our inability to hire professionals with the same level of experience could have a material adverse effect on our business, financial condition and results of operations.

 

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In addition, in order for us to successfully compete and increase the number of customers, we need to attract, recruit, retain and develop talented employees generally, who can provide the required expertise across the entire spectrum of our needs for high quality products, services and educational content, including for sales and marketing. A number of our key employees have significant experience in our operations, and we must develop adequate succession plans to maintain continuity amidst the natural uncertainties of the labor force. The market for skilled staff is competitive, and we may not be successful in recruiting or retaining staff or we may not be able to effectively replace key employees who leave. We must also continue to hire additional staff to execute our strategic plans. Our efforts to retain and develop personnel may also result in significant additional expenses that could adversely affect our business and results of operations.

We cannot guarantee that qualified employees will remain in our employment or that we will be able to attract and retain qualified personnel in the future. In particular, we may not be able to achieve the anticipated revenue growth by expanding our sales and marketing teams if we are not able to attract, develop and retain qualified sales and marketing personnel in the future. Any failure to retain or hire key personnel could have a material adverse effect on our business, financial condition and results of operations.

Our management team’s interests may be focused on the short-term market price of our Class A common shares, which may not coincide with investors’ interests.

Our directors and executive officers, among others, may own shares in the company or be beneficiaries of our share-based compensation plans. We expect to implement a share-based compensation plan in connection with this offering. We intend to reserve up to 3.0% of our total capital stock for issuances under our share-based compensation plan.

Due to the issue of Class A common shares to members of our management team, a significant portion of these members’ compensation will be closely tied to our operating results and, more specifically, to the trading price of our Class A common shares, which may lead these individuals to run our business and manage our activities with an emphasis on generating short-term profits. As a result of these factors, our management team’s interests may not coincide with the interests of our other shareholders who have long-term investment objectives. Additionally, we cannot assure that Cogna’s and our management team’s interest will be aligned, or which party’s interest will prevail.

Moreover, our shareholders may experience dilution in their stakes in our capital stock and in the value of their investments if further shares are issued to honor share-based incentive plans for our management and employees.

In the case of further grants of stock options or restricted shares, our shareholders will be subject to further dilution. For additional information about our share option plan or restricted share plan, see “Management—Share Incentive Plan.”

Failure to prevent or detect a malicious cyber-attack on our systems and databases could result in a misappropriation of confidential information or access to highly sensitive information.

Cyber-attacks are becoming more sophisticated and pervasive. Across our business we hold large volumes of personally identifiable information including that of employees, partner schools, students, parents and legal guardians. Individuals may try to gain unauthorized access to our data in order to misappropriate such information for potentially fraudulent purposes, and our security measures may fail to prevent such unauthorized access. Our board of directors, assisted by our Audit and Risk Committee, as part of its regular review of our risk management practices, performs periodic reviews of cyber-security threats and related controls, including reviews of periodic penetration tests performed by independent third parties. However, we cannot assure that these reviews will successfully prevent against all cyber-attacks. A breach could result in a devastating impact on our reputation, with significant adverse effects on customer confidence and loyalty that could adversely affect

 

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our financial condition and the student experience. In addition, if we were unable to prove that our systems are properly designed to detect an intrusion, we could be subject to severe penalties under applicable laws and loss of existing or future business.

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

The nature of our business exposes us to risks related to possible shortcomings in data protection. Any perceived or actual unauthorized disclosure of personally identifiable information, whether through breach of our network by an unauthorized party, employee theft, misuse or error or otherwise, could harm our reputation, impair our ability to attract and retain our customers, or subject us to claims or litigation arising from damages suffered by individuals.

On December 28, 2018, Provisional Measure No. 869/2018 was passed, amending certain provisions of the General Personal Data Protection Law (Lei Geral de Proteção de Dados), or LGPD, and setting up the National Data Protection Authority (Autoridade Nacional de Proteção de Dados), or ANPD. This measure also extended the deadline for companies to comply with the LGPD to August 2020. Considering the effects of COVID-19, Brazilian Congress approved Bill No. 1179/20 that, inter alia, postpones the enforceability of the administrative sanctions provided for by the LGPD to August 1, 2021. This Bill has been forwarded to the Brazilian President for approval. In parallel, Provisional Measure No. 959, issued by the President in April 2020, postpones the date of entry into force of the LGPD to May 3, 2021. Note that, to remain valid, this Provisional Measure must be approved by Congress. If not, the LGPD will enter into force on August 16, 2020, as originally intended.

As a result of any failure to comply with the LGPD or occurrence of cybersecurity incidents, we may be subject to the following penalties: (1) legal notices and the required adoption of corrective measures, (2) fines of up to 2.0% of our company’s or our group’s revenue up to a limit of R$50.0 million per infraction, (3) disclosure of the violation after its occurrence is duly verified and confirmed, and (4) blocking and erasing the personal data involved in the violation.

Failure to comply with the rules for the protection of personally identifiable information, including the LGPD, could potentially lead to legal proceedings or could result in penalties, significant remediation costs, reputational damage, the cancellation of existing contracts and difficulty in competing for future business. In addition, we could incur significant costs in complying with relevant laws and regulations regarding the unauthorized disclosure of personal information, which may be affected by any changes to data privacy legislation at both the federal and state levels.

Material weaknesses in our internal control over financial reporting have been identified, and if we fail to establish and maintain proper and effective internal controls over financial reporting, our results of operations and our ability to operate our business may be harmed.

While part of our business has been operated in the past as part of publicly traded companies in Brazil (Cogna and Somos), prior to this offering, our accounting personnel and other resources were not structured in a manner consistent with the requirements applicable to a public company listed in the United States. In connection with the audit of our financial statements, we and our independent registered public accounting firm identified certain material weaknesses in our internal controls. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected on a timely basis. The material weaknesses identified generally relate to our insufficient accounting processes necessary to comply with the reporting and compliance requirements of IFRS and the SEC. Specifically, the material weaknesses identified relate to the (1) ineffective design, implementation and operation of general information technology controls, or GITCs, in the areas of user access and program change-management over information technology systems that support our financial reporting processes, which resulted in business process controls that are dependent on the affected GITCs; (2) ineffective design, implementation and operation of controls within

 

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the financial reporting process relating to preparation and review of the financial statements, including the technical application of generally accepted accounting principles and applicability of required disclosures; (3) ineffective design, implementation and operation of controls within the financial process covering the analysis of complex and unusual transactions and judgments including the criteria for allocation of certain transactions in order to properly present the combined carve-out financial statements; and (4) ineffective design of controls over sales cut-off.

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

After this offering, we will be subject to the Sarbanes-Oxley Act, which requires, among other things, that we establish and maintain effective internal controls over financial reporting and disclosure controls and procedures. Under the current rules of the SEC, we will be required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to assess the effectiveness of our internal controls over financial reporting as well as our disclosure controls and procedures. Our testing may reveal additional deficiencies in our internal controls that are deemed to be material weaknesses or significant deficiencies and render our internal controls over financial reporting ineffective. We may also identify deficiencies in our disclosure controls and procedures. We expect to incur additional accounting and auditing expenses and to spend significant management time in complying with these requirements. If we are not able to comply with these requirements in a timely manner, or if we or our management identifies additional material weaknesses or significant deficiencies in our internal controls over financial reporting or in our disclosure controls and procedures, the market price of our Class A common shares may decline and we may be subject to investigations or sanctions by the SEC, the Financial Industry Regulatory Authority, Inc., or FINRA, or other regulatory authorities.

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

We may lose bargaining power with our customers if they organize themselves into negotiating blocs, which could have an adverse effect on our business.

Although the education market in Brazil is extremely fragmented, which reduces the bargaining power of individual schools, groups of schools could organize as blocs or syndicates in an attempt to negotiate lower prices for our services or greater benefits, products and services at the same price. If our schools organized as blocs in an attempt to negotiate lower prices, we would be required to devote additional resources to contract negotiations and could face additional challenges in providing cross-selling or up-selling opportunities to these schools. We could be forced to offer lower prices in connection with any such negotiations or provide bundled services at a discount in an effort to maintain and expand our market share. If we lose bargaining power with our customers, we cannot guarantee that we will be able to sell our products and services at profitable prices, which would adversely affect our business, financial condition and results of operations.

Certain of our revenue depends on intermediaries such as large retailers and other distribution channels, and financial difficulties or poor service by these providers could adversely affect our revenue, reputation and results of operations.

We rely on certain intermediaries, such as large retailers and other distribution channels, to make our educational content and products and services available to parents and students. Consequently, a portion of our revenue depends on the level of service offered by these providers, which could depend on their financial and

 

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operational health, and their ability to provide adequate service to end consumers. If any of these intermediaries face solvency problems or are unable to provide services or fail to honor their financial commitments to us, our revenue, reputation and results of operations could be adversely affected.

We cannot assure that we have enforceable written contracts in place with all of our suppliers and other third parties with which we conduct business.

We have many suppliers and maintain business relations with a number of third parties. However, not all of our commercial relationships with third parties are formalized through written contracts. The absence of a written contract formalizing our commercial relationships could have an adverse effect on our business, as we may need the existence of written contracts to, among other things, substantiate our commercial relationship with the third party in court, defend ourselves against any litigation by the third party or enforce our rights against the third party in the event of a dispute. If we are subject to any conflicts with third parties with whom we do not maintain written contracts in force, our business, financial condition and results of operations could be materially adversely affected.

We may face restrictions and penalties under the Consumer Defense Code in the future.

Brazil has a series of strict consumer defense laws, known as the Consumer Defense Code. These laws apply to every company in Brazil that provides products or services to Brazilian consumers. They include protection against misleading and specious advertising, protection against coercive or unfair commercial practices and protection in drafting and interpreting agreements, normally in the form of civil responsibilities and administrative penalties for violations. We may infringe or be accused of infringing the Consumer Defense Code, and incur penalties, and we may be unable to contest such penalties.

Penalties may be imposed by the branches of the Consumer Protection and Defense Foundation (Programa de Proteção e Defesa do Consumidor), or PROCON, or by the National Consumer Department (Secretaria Nacional do Consumidor), or SENACON. Companies can reach agreements for complaints submitted by consumers to PROCON branches by paying an indemnity directly to the consumers or through a mechanism that allows them to adjust their conduct, called a Conduct Adjustment Agreement (Termo de Ajuste de Coduta), or TAC. Any indemnities or TACs could adversely affect our reputation and financial situation.

The public prosecutor’s office and public defenders in Brazil can also initiate investigations of alleged violations of consumer rights and demand that companies sign a TAC. Companies that fail to comply with TACs face potential enforcement procedures and other penalties such as fines, as provided for in each TAC. The public prosecutor’s office and public defenders in Brazil can also file public civil proceedings against companies that violate consumer rights or the rules of competition, to ensure strict compliance with the consumer defense laws and indemnities for any damage to consumers. In certain cases, we may also face investigations and/or sanctions by CADE, in the event that our commercial practices are accused of affecting competition in the markets where we operate or the consumers in these markets.

Other methods of entry of students into universities, other than university entrance exams or ENEM, could put our preparatory course business at risk.

Our preparatory courses are focused on preparing students to enter universities by means of specific entrance exams or through ENEM and are powerful lead-generation tools for our go-to-market strategy. These preparatory courses are specifically tailored in an effort to help students achieve success in entrance exams that are focused on specific criteria and aptitudes and are administered according to known methodologies. If universities were to change their admissions criteria to focus primarily on grades achieved in secondary school, demand for our preparatory courses could decline. Likewise, if universities used new or alternative entrance exams based on different content or testing methodologies, our existing preparatory courses may not be adequate in preparing students for any such new alternative entrance exams or alternative testing methodologies, and we

 

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may not be successful in adapting our existing courses at the pace needed to respond to such changes in exams or testing methodologies, or at all, which could impact the reputation of our preparatory courses and lead to a decrease in enrollment in our courses. We could also face challenges in adapting our courses in a cost-efficient manner, which could have an adverse impact on our business and results of operations. Any change in admissions practices for which we are unable to successfully adapt our current preparatory courses could cause a decline in enrollment in our courses, force us to lower our prices and/or result in increased costs, and would have a material adverse effect on our business, financial condition and results of operations.

We are susceptible to the illegal or improper use of our Content & EdTech and Digital Platforms, which could expose us to liability and damage our business.

Our Content & EdTech and Digital Platforms are susceptible to unauthorized use, software license violations, copyright violations and unauthorized copying and distribution (whether by students, schools or others), theft, employee fraud and other similar infractions and violations. Such occurrences can harm our business and consequently negatively affect our operating results. We could be required to expend significant resources to police against and combat improper use of our Content & EdTech and Digital Platforms, and still may be unsuccessful in preventing against such occurrences or identifying those responsible for any such misuse. Any failure to adequately protect against any such illegal or improper use of our platforms could expose us to liability or reputational harm and could have a material adverse effect on our business, financial condition and results of operations.

Unfavorable decisions in our legal or administrative proceedings may adversely affect us.

We are, and may be in the future, party to legal and administrative proceedings arising from the ordinary course of our business or from nonrecurring corporate, tax or regulatory events, involving our suppliers, students and faculty members, as well as from environmental events, competition and tax authorities, especially with respect to civil, tax and labor claims. For instance, Somos Educação, which used to operate our K-12 business under the Anglo brand, is currently party to an administrative proceeding with the sellers of the Anglo business due to a dispute with the sellers regarding indemnities for certain contractual contingencies, for which we have classified the risk of losses as probable, possible and remote, in the amount of R$13.8 million that we understand to be their responsibility, and which are disputed by the sellers. At the time of the business combination an indemnification asset was recorded. The book value of the asset at December 31, 2019 is R$3.0 million. However, we cannot assure that our position will prevail, and we could be subject to an adverse outcome in this proceeding, that, considered in the aggregate with other proceedings both known and unknown to us, could have an adverse effect on our financial condition and results of operations. We cannot guarantee that the results of these proceedings will be favorable to us or that we have made sufficient provisions for liabilities that may arise as a result of these or other proceedings. Adverse decisions in material legal proceedings may adversely affect our results of operations, reputation and the price of our Class A common shares. See “Business—Legal and Administrative Proceedings.”

We may not be sufficiently protected by our parent company against potential liabilities arising from past business practices related to Somos Sistemas that could materialize in the future.

In connection with our corporate reorganization, on December 5, 2019, our subsidiary Somos Sistemas entered into an indemnification agreement with our parent company, Cogna, whereby the latter agreed to indemnify us for cash outflows related to contingencies that may arise due to events occurring prior to the corporate reorganization process that is being held by Cogna Group, for up to R$151.1 million, including for contingencies or lawsuits that may materialize after January 1, 2020 so long as the events for which such contingency arises occurred prior to January 1, 2020. However, this indemnity agreement does not prevent our assets being subject to certain legal restrictions, such as the freezing of our bank accounts, which could require additional reimbursements or further legal action to release our assets, and we cannot guarantee that the indemnifying party will take such actions on a timely basis, or at all, which could have an adverse effect on our business and financial condition.

 

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We outsource certain labor, which may create an obligation on our part to pay certain labor and social security obligations.

We outsource certain labor, primarily for cleaning services, building renovations and surveillance, and contract with third party companies who provide the employees for these services. Because we benefit from the services provided by these outsourced workers, we may become liable under Brazilian law to pay certain labor and social security obligations for the benefit of these workers if the service provider companies providing such outsourced labor fail to comply with their labor and social security obligations on behalf of these workers, and may also be fined by the relevant authorities. We may not have any recourse against the employers of these workers if they fail to meet their labor and social security obligations. We are unable to predict the potential size of any such liability. Any requirement to pay the labor and social obligations related to outsourced workers could have a material adverse effect on our financial condition and results of operations.

We currently sell products and services to government agencies, which subjects us to certain penalties if we do not satisfactorily fulfill our agreements with government agencies or if the agreements are terminated early and we may be subject to liability for prior sales to government agencies in connection with activities undertaken in the past by our affiliates or subsidiaries of our parent company.

We are currently party to certain agreements with government agencies related to the sale of our educational materials, which currently represents a small portion of our total net revenue from sales and services. While we do not plan on emphasizing the selling of educational materials to government agencies, we must maintain several agreements with government agencies in force until their expiration in December 2020. If we fail to adequately perform on our contracts with government agencies before their expiration, we would be subject to sanctions under Law 8,666/91, which range from warnings and fines, to prohibitions on doing business with the government for a period of up to 8 years. In addition, we could be subject to indemnity claims, and claims for losses or damages, any of which could have an adverse effect on our business and reputation.

In addition, we may be held responsible in the future for past business operations that we no longer undertake, such as the sale of teaching material to the federal government under the Programa Nacional do Livro e do Material Didático, or the PNLD. We no longer do business under the PNLD, but we may be subject to certain liabilities, including in connection with applicable anti-corruption laws, for past dealings. While our parent company agreed to indemnify us against certain contingent liabilities, including certain past dealings with government agencies, as part of our corporate reorganization, there can be no assurance that the indemnification agreement with our parent company will fully protect us against potential legal proceedings or government actions, which could have an adverse effect on our business, our reputation, our financial condition and results of operations.

The assignment to us of sales agreements with the Industry Social Service (Serviço Social da Indústria), or SESI, is subject to consent by SESI and we cannot assure you that such consent will be granted.

Other subsidiaries of our parent company are currently party to approximately 24 agreements with SESI/SENAI for the sale of educational content to schools maintained by SESI/SENAI. We expect that these agreements will be assigned to us as part of our parent company’s ongoing corporate reorganization, giving us the right and obligation to supply educational content to SESI to the end of the term of the existing agreements. However, assignment of these agreements is subject to prior approval by SESI, which approval SESI has not been granted as of the date of this prospectus, nor can we assure that SESI will approve such assignments. If SESI does not approve the assignment of such agreements in connection with the corporate reorganization, either in whole or in part, we will not be entitled to receive the revenue we expect to receive in 2020 for sales of educational content to schools operated by SESI, which would have an adverse effect on our business and results of operations. For the three months ended March 31, 2020, net revenue from sales and services derived from the sales agreements with SESI that we expect will be assigned to us totaled R$7.0 million and R$26.8 million for the year ended December 31, 2019. Our parent company’s corporate reorganization could also be delayed, and

 

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our management may choose to delay the assignment of the SESI agreements to us until completion of the corporate reorganization or may seek to assign such agreements subject to the condition precedent that SESI approve such assignment further delaying the assignment of such agreements to us. Any delay in our ability to generate revenue from the sale of educational content to schools operated by SESI under these agreements would have an adverse effect on our business and results of operations.

We have recorded provisions for tax, civil and labor losses for past business practices and acquired businesses that could materialize in the future, which could have an adverse effect on our business and financial condition.

As of March 31, 2020, in connection with our past business practices and acquired businesses, we have recorded provisions for tax, civil and labor losses on our statement of financial position in an amount of R$608.3 million primarily related to litigation assumed in connection with acquired businesses, including Somos-Anglo, Pluri Educacional and MindMakers. While the sellers of such businesses provided contractual indemnities against eventual contingent liabilities associated with these businesses, depending on the eventual outcome of potential claims or proceedings related to these contingencies, the contractual indemnities offered by the sellers, and the amounts we have recorded as provisions on our statement of financial position, may not be sufficient to cover the financial liabilities that we may face in connection with such contingencies, which could have a material adverse effect on our business and financial condition. In addition, on December 5, 2019, our subsidiary Somos Sistemas entered into an indemnification agreement with our parent company, Cogna, whereby the latter agreed to indemnify us for cash outflows related to contingencies that may arise due to events occurring prior to the corporate reorganization process that is being held by Cogna Group, for up to R$151.1 million. However, depending on the final results of eventual legal proceedings and the volume of contingencies that arise up to the date of this offering, such indemnity may not be sufficient to cover all of our losses, which would have an adverse effect on our financial condition and results of operations. For example, Somos Educação, which used to operate our K-12 business under the Anglo brand, is currently party to an administrative proceeding with the sellers of the Anglo business due to a dispute with the sellers regarding indemnities for certain contractual contingencies, for which we have classified the risk of losses as probable, possible and remote, in the aggregate amount of R$13.6 million that we understand to be their responsibility, and which are disputed by the sellers. At the time of the business combination an indemnification asset was recorded. The book value of the asset at March 31, 2020 is R$3.0 million. However, we cannot assure that our position will prevail, and we could be subject to an adverse outcome in this proceeding, that, considered in the aggregate with other proceedings both known and unknown to us, could have an adverse effect on our financial condition and results of operations. We cannot guarantee that the results of these proceedings will be favorable to us or that the indemnity granted to us by our parent company would be sufficient to cover liabilities that may arise as a result of these or other proceedings. If losses that arise in the future exceed the indemnity granted by our parent company, our business and results of operations will be negatively affected.

We may be held responsible for events that occur on the premises of our customers or at the sites where we offer our preparatory courses, which could adversely affect our business.

We could be held responsible for actions made by students, staff or third parties on the premises of our partner schools or at the sites where we offer our preparatory courses. In the event of accidents, injuries, harassment or other illegal acts or if anyone is harmed on the premises of our partner schools or at the sites where we offer our preparatory courses, we could be involved in legal proceedings claiming that we are directly or indirectly responsible for the relevant harm, whether due to allegations of negligence or lack of adequate supervision. If we are unsuccessful in defending ourselves against any such proceedings, an adverse decision against us could have a material adverse effect on our business and reputation, and on our financial condition and results of operations.

 

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We could be adversely affected if we are unable to renegotiate collective labor agreements with the unions representing our staff, or by strikes or other union action. In addition, we may be adversely affected by negotiations made by the unions that represent our employees if such negotiations are not in line with our business plan and financial condition and we may not be able to pass on our cost increases by means of adjusting the contractual rates we charge our customers, which may affect our operating results.

Salaries and payroll charges account for a significant component of our total expenses (which are comprised of the sum of costs of goods sold and services, general and administrative, commercial and other expenses). Salaries and payroll charges for the three months ended March 31, 2020 were R$63.2 million, or 20.2%, of the Successor’s total expenses of R$313.7 million. For the year ended December 31, 2019, salaries and payroll charges of the Successor were R$200.6 million, representing 22.1% of the total expenses of R$907.2 million. The salaries and payroll charges of the Successor for the period from October 11 to December 31, 2018 was R$62.4 million, or 30.4% of the Successor’s total expenses, which was R$205.4 million. The salaries and payroll charges of the sum of the Predecessors for the period from January 1 to October 10, 2018 was R$185.9 million, or 26.1% of the Predecessors’ total expenses, which was R$711.9 million. The salaries and payroll charges of the Predecessors for the year ended December 31, 2017 was R$176.7 million, or 27.8% of the Predecessors’ total expenses, which was R$637.2 million. Our employees are represented by unions with a strong presence in the K-12 education sector and are covered by collective bargaining agreements or similar arrangements that determine how many hours they work, their minimum compensation and salary adjustments (which are generally linked to inflation), vacation time and additional benefits, among other terms. These agreements are renegotiated annually and may be modified to our disadvantage in the course of these negotiations. We might also be adversely affected if we are unable to establish and maintain cooperative relations with the unions representing our staff, or we might face strikes, stoppages or other labor disturbances by our employees.

Our negotiations with the unions that represent our employees are not always in line with our business plan and such unions may not always consider our current financial condition in when they take certain negotiating positions. Consequently, these unions may pursue terms and conditions under collective bargaining agreements that may be beneficial to our employees but would adversely affect us.

Additionally, we might not be able to pass on cost increases due to the renegotiation of collective bargaining agreements to the fees we charge our customers, and this could have a material adverse effect on our business.

Our educational content might not meet all the requirements of the National Common Curriculum Base, and this could adversely affect our revenue from the sale of educational products and content.

The National Education Plan (Plano Nacional de Educação) passed pursuant to Law No. 13,005/2014 created a National Common Curriculum Base (Base Nacional Comum Curricular or BNCC). The BNCC is a series of guidelines defining a curriculum that specifies the key abilities and knowledge that must be taught as part of primary and secondary education in Brazil, and each institution has discretion to design or adapt its curriculum and teaching projects in line with the BNCC guidelines. The standards set by the BNCC may influence the decisions taken by teaching professionals in private schools. If we are unable to successfully incorporate all the BNCC standards into our educational products and content, our sales of teaching products and solutions could be adversely affected, which could have a material adverse effect on our business, financial condition and results of operations.

We may be adversely affected by legal proceedings involving our parent company or members of its management.

Our parent company is party to legal proceedings that could subject it to financial liability. If our parent company fails to pay fines or penalties assessed in any such proceedings when due, its equity interest in subsidiaries, including us, could be seized in satisfaction of such obligations. Any condemnation of other companies controlled by our parent company could also adversely affect the price of our shares. Moreover,

 

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management of our operations could be adversely affected if any member of management of our parent company is subjected to imprisonment or restriction on liberty pursuant to any court order, which could have an adverse effect on our business, results of operations and financial condition.

We may not have sufficient insurance to protect ourselves against substantial losses.

We have insurance policies to provide coverage against certain potential risks, such as property damage and personal injury, as well as D&O insurance for our management team. However, we cannot guarantee that our insurance coverage will always be available or will be sufficient to cover possible claims for these risks. In addition, there are certain types of risk that might not be covered by our policies, such as war, acts of nature, force majeure or interruption of certain activities. Moreover, we might be obliged to pay fines and other penalties in the event of delays in product delivery, and such penalties are not covered by our insurance policies. Additionally, we may not be able to renew our current insurance policies under the same terms or at all. Risks not covered by our insurance policies or the inability to renew policies on favorable terms or at all could adversely affect our business and financial condition.

If we are not able to obtain, renew or register our lease agreements on favorable terms, our results of operations may be adversely affected.

According to Brazilian law, a lessee has the right to renew existing leases for subsequent terms equal to the original term of the lease. In order for a lessee to enforce this right, the following criteria must be met (1) the non-residential lease agreement must have a fixed term equal to or greater than five consecutive years, or, in the event there is more than one agreement or amendments thereto regarding the same real estate, the aggregate term in all such agreement and amendments must be greater than five consecutive years, (2) the lessee must have been using the property for the same purpose for a minimum period of three years and (3) the lessee must claim the right of renewal at the most one year and at least six months prior to the end of the term of the lease agreement.

The lease agreements for a few some of our facilities are for periods of less than five years, and therefore are not entitled to renewal rights, and so the lessor might refuse to renew when the lease expires. In addition, a few of our leases have indeterminate terms and are subject to termination at any time by the lessor so long as the lessor provides notice to the lessee at least 30 days from the date the lessor wants the lessee to vacate the property. If we are forced to close any of our educational facilities or have to find other properties due to the termination of a lease agreement and our inability to renew the lease, our business and results of operations may be adversely affected.

The lease agreements for some of the properties we use are not registered with the corresponding property registry. Registering and obtaining a certificate of registration for our lease agreements with the appropriate registries may take longer than expected or may not be successfully completed due to obstacles that are unknown to us and are outside of our control. Registering the lease agreements and obtaining the appropriate certificate of registration is important, especially should the property be transferred to a third party, because the third party who acquires the property will be bound by the lease agreement, provided it was (1) entered into for a specified term, (2) has a duration clause and (3) is registered in and approved by the competent real estate registry office. Should a duly registered leased property be put up for sale, the lessee will have a right of first refusal However, if the lease agreement is not registered, the lessee may not contest an infringement of its right of first refusal. If we do not have a right of first refusal our business may be adversely affected.

We are currently in the process of obtaining or renewing local licenses and permits, including licenses from the fire department, for some of the real estate we use and the businesses we operate. Failure to obtain renewals of these licenses and permits on a timely manner may result in penalties, including closures of some of our educational facilities, which could adversely affect us.

The use of all of our buildings is subject to the successful acquisition of an occupancy permit (Habite-se), or equivalent certificate, issued by the municipality where the property is located, certifying that the building has no

 

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deficiencies. In addition, nonresidential properties are required to have a use and operations license and/or permit, issued by the competent municipality, and a fire department inspection certificate and other licenses and registrations necessary for their regular use.

We are currently in the process of obtaining or renewing these licenses for some of the properties we use and the businesses we operate. The absence of such licenses may result in penalties ranging from fines to forced demolition of the areas that were not built in compliance with applicable codes or, in the worst scenario, closure of the educational facility lacking the licenses and permits. Failure to register with municipal, state or federal bodies may damage us because we shall not be able to collect charges from our customers due to our inability to issue proper tax receipts.

Any penalties imposed, and in particular the forced closure of any of our units, may result in a material adverse effect on our business. Moreover, in the event of any accident at our educational facilities, the lack of such licenses may result in civil and criminal liability, as well as cause the cancellation of eventual insurance policies for the respective facility and may damage our reputation.

In connection with our corporate reorganization, we depend on certain authorizations from public entities to be able to continue issuing invoices and any failure to obtain such authorizations could adversely affect our business.

In connection with our ongoing corporate reorganization, we may face delays in obtaining authorization from public entities to issue invoices, and the billing process to our customers may be delayed, which would adversely affect our operational results. We depend on grants from public entities authorizing us to issue invoices related to the sales of our products and services. In case we cannot timely issue invoices, our billing process may be delayed, and we will not receive proceeds from our customers in a timely manner which would adversely affect our operational results.

Any liquidation proceedings involving a company of our group may be conducted on a consolidated basis.

In the event of liquidation proceedings involving a company of the Cogna group, Brazilian courts may consider our assets and liabilities to be unified within the scope of such liquidation proceedings as if they belonged to a single company on a consolidated basis (Teoria da Consolidação Substancial), allocating our parent net investments to pay creditors of our parent company or other companies in our group. If this happens, the value of our shares may be adversely affected.

Certain Factors Relating to Brazil

The Brazilian federal government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement as well as Brazil’s political, regulatory, legal and economic conditions could harm us and the price of our Class A common shares.

The Brazilian federal government frequently exercises significant influence over the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures, increases or decreases in interest rates, changes in fiscal policies, wage and price controls, foreign exchange rate controls, blocking access to bank accounts, currency devaluations, capital controls and import and export restrictions. We have no control over and cannot predict what measures or policies the Brazilian government may take in the future, and how these can impact us and our business. We and the market price of our securities may be harmed by changes in Brazilian government policies, as well as general economic factors, including, without limitation:

 

   

growth or downturn of the Brazilian economy;

 

   

interest rates and monetary policies;

 

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exchange rates and currency fluctuations;

 

   

inflation;

 

   

liquidity of the domestic capital and lending markets;

 

   

import and export controls;

 

   

exchange controls and restrictions on remittances abroad and payments of dividends;

 

   

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

 

   

fiscal policy and changes in tax laws;

 

   

economic, political and social instability, including general strikes and mass demonstrations;

 

   

the regulatory framework governing the educational industry;

 

   

labor and social security regulations;

 

   

energy and water shortages and rationing;

 

   

commodity prices including prices of paper and ink;

 

   

changes in demographics, in particular declining birth rates, which will result in a decrease in the number of enrolled students in primary and secondary education in the future; and

 

   

other political, diplomatic, social and economic developments in or affecting Brazil.

Uncertainty over whether the Brazilian federal government will implement reforms or changes in policy or regulation affecting these or other factors in the future may affect economic performance and contribute to economic uncertainty in Brazil, which may have an adverse effect on our activities and consequently our operating results and may also adversely affect the trading price of our Class A common shares. Recent economic and political instability has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian securities markets, which also may adversely affect us and our Class A common shares. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Brazilian Macroeconomic Environment.”

The ongoing economic uncertainty and political instability in Brazil, including as a result of ongoing investigations, may harm us and the price of our Class A common shares.

Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities offered by companies with significant operations in Brazil.

The recent economic instability in Brazil have contributed to a decline in market confidence in the Brazilian economy. Various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest of such investigations, known as “Operação Lava Jato,” have negatively impacted the Brazilian economy and political environment. The potential outcome of these investigations is uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy. We cannot predict whether the ongoing investigations will result in further political and economic instability, or if new allegations against government officials and/or executives of private companies will arise in the future. A number of senior politicians, including current and former members of Congress and the Executive Branch, and high-ranking executive officers of major corporations and state-owned companies in Brazil were arrested, convicted of various charges relating to corruption, entered into plea agreements with federal prosecutors and/or have resigned or been removed from their positions as a result of these Lava Jato investigations. These

 

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individuals are alleged to have accepted bribes by means of kickbacks on contracts granted by the government to several infrastructure, oil and gas and construction companies. The profits of these kickbacks allegedly financed the political campaigns of political parties, for which funds were unaccounted or not publicly disclosed. These funds were also allegedly directed toward the personal enrichment of certain individuals. The effects of Lava Jato as well as other ongoing corruption-related investigations resulted in an adverse impact on the image and reputation of the companies that have been implicated as well as on the general market perception of the Brazilian economy, political environment and capital markets. We have no control over, and cannot predict, whether such investigations or allegations will lead to further political and economic instability or whether new allegations against government officials will arise in the future.

Amidst this background of recent political uncertainty, in August 2016, the Brazilian Senate approved the removal from office of Brazil’s then-President, Dilma Rousseff, following a legal and administrative impeachment process for infringement of budgetary laws. Michel Temer, the former Vice-President, who assumed the presidency of Brazil following Rousseff’s ouster, is also under investigation on corruption allegations. In addition, the former President, Luiz Inácio Lula da Silva, began serving a 12-year prison sentence on corruption and money laundering charges in April 2018 yet had led for a while the polls as a top contender to win the 2018 presidential election. On October 28, 2018, Jair Bolsonaro, a former member of the military and three-decade congressman, was elected the president of Brazil and took office on January 1, 2019. During his presidential campaign, Mr. Bolsonaro was reported to favor the privatization of state-owned companies, economic liberalization, and social security and tax reforms. However, there is no guarantee that Mr. Bolsonaro will be successful in executing his campaign promises or passing certain reforms fully or at all, particularly when confronting a divided Congress. In addition, his current minister of the economy, Paulo Guedes, proposed during the presidential campaign the revocation of the income tax exemption on the payment of dividends, which, if enacted, would increase the tax expenses associated with any dividend or distribution by Brazilian companies, which could impact our capacity to receive future cash dividends or distributions net of taxes from our subsidiaries. Moreover, Mr. Bolsonaro was generally a polarizing figure during his campaign for the presidency, particularly in relation to certain of his behavioral views, and we cannot predict the ways in which a divided electorate may continue to impact his presidency and ability to implement policies and reforms, as well as external perception regarding the Brazilian economy and political environment, all of which could have a negative impact on our business and the price of our securities. In addition, the Brazilian Supreme Court is currently investigating President Bolsonaro in connection with certain allegations made by the former Minister of Justice.

It is expected that the current Brazilian federal government may propose the general terms of fiscal reform to stimulate the economy and reduce the forecasted budget deficit for 2020 and following years, but it is uncertain whether the Brazilian government will be able to gather the required support in the Brazilian Congress to pass additional specific reforms. We cannot predict which policies the Brazilian federal government may adopt or change or the effect that any such policies might have on our business and on the Brazilian economy. In addition, the Brazilian government is incurring significant levels of debt to finance measures to combat the COVID-19 pandemic which is expected to increase the Brazilian budget deficit. Any such new policies or changes to current policies, including measures to combat the COVID-19 pandemic, may have a material adverse impact on our business, results of operations, financial condition and prospects.

Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business and the price of our Class A common shares.

Inflation and certain measures by the Brazilian government to curb inflation have historically harmed the Brazilian economy and Brazilian capital markets, and high levels of inflation in the future would harm our business and the price of our Class A common shares.

In the past, Brazil has experienced extremely high rates of inflation. Inflation and some of the measures taken by the Brazilian government in an attempt to curb inflation have had significant negative effects on the

 

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Brazilian economy generally. Inflation, policies adopted to curb inflationary pressures and uncertainties regarding possible future governmental intervention have contributed to economic uncertainty and heightened volatility in the Brazilian capital markets.

According to the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or IPCA, which is published by the Brazilian Institute for Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, Brazilian inflation rates were 4.3%, 3.8% and 3.0% for the years ended December 31, 2019, 2018 and 2017, respectively, and 0.53% for the three months ended March 31, 2020. Brazil may experience high levels of inflation in the future and inflationary pressures may lead to the Brazilian government’s intervening in the economy and introducing policies that could harm our business and the price of our Class A common shares. One of the tools used by the Brazilian government to control inflation levels is its monetary policy, specifically in regard to the official Brazilian interest rate. An increase in the interest rate restricts the availability of credit and reduces economic growth, and vice versa. During recent years there has been significant volatility in the official Brazilian interest rate, which ranged from 14.25%, on December 31, 2015, to 4.50% on December 31, 2019. As of the date hereof, the official Brazilian interest rate is 2.25%. This rate is set by the Monetary Policy Committee of the Central Bank of Brazil (Comitê de Política Monetária), or COPOM. Any change in interest rate, in particular any volatile swings, can adversely affect our growth, indebtedness and financial condition.

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

The Brazilian currency has been historically volatile and has been devalued frequently over the past three decades. Throughout this period, the Brazilian government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. Although long-term depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter periods of time has resulted in significant variations in the exchange rate between the real, the U.S. dollar and other currencies. In 2014, the real depreciated by 11.8% against the U.S. dollar, while in 2015 it further depreciated by 32%. The real/U.S. dollar exchange rate reported by the Central Bank was R$3.259 per US$1.00 on December 31, 2016, an appreciation of 16.5% against the rate of R$3.905 per US$1.00 reported on December 31, 2015. In 2017, the real depreciated by 1.5%, with the exchange rate reaching R$3.308 per US$1.00 on December 31, 2017. In 2018, the real depreciated an additional 17.1%, to R$3.875 per US$1.00 on December 31, 2018. The real/U.S. dollar exchange rate reported by the Central Bank was R$4.031 per US$1.00 on December 31, 2019, which reflected a 4.0% depreciation of the real against the U.S. dollar for the year. Recently, due to the COVID-19 and the economic and political instability, the real depreciated 47.2% against the U.S. dollar since December 31, 2019, and reached R$5.937 per US$1.00 as of May 14, 2020, its lowest level since the introduction of the currency in 1994. The exchange rate reported by the Central Bank was R$5.183 per US$1.00 on July 30, 2020. There can be no assurance that the real will not again depreciate against the U.S. dollar or other currencies in the future.

A devaluation of the real relative to the U.S. dollar could create inflationary pressures in Brazil and cause the Brazilian government to, among other measures, increase interest rates. Any depreciation of the real may generally restrict access to the international capital markets. It would also reduce the U.S. dollar value of our results of operations. Restrictive macroeconomic policies could reduce the stability of the Brazilian economy and harm our results of operations and profitability. In addition, domestic and international reactions to restrictive economic policies could have a negative impact on the Brazilian economy. These policies and any reactions to them may harm us by curtailing access to foreign financial markets and prompting further government intervention. A devaluation of the real relative to the U.S. dollar may also, as in the context of the current economic slowdown, decrease consumer spending, increase deflationary pressures and reduce economic growth.

On the other hand, an appreciation of the real relative to the U.S. dollar and other foreign currencies may deteriorate the Brazilian foreign exchange current accounts. Depending on the circumstances, either devaluation

 

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or appreciation of the real relative to the U.S. dollar and other foreign currencies could restrict the growth of the Brazilian economy, as well as affecting our business, results of operations and profitability.

Infrastructure and workforce deficiency in Brazil may impact economic growth and have a material adverse effect on us.

Our performance depends on the overall health and growth of the Brazilian economy. Brazilian GDP growth has fluctuated over the past few years, with contractions of 3.5% and 3.3% in 2015 and 2016, respectively, followed by growth of 1.3% in both 2017 and 2018, and 1.1% in the year ended December 31, 2019. Growth is limited by inadequate infrastructure, including potential energy shortages and deficient transportation, logistics and telecommunication sectors, general strikes, the lack of a qualified labor force, and the lack of private and public investments in these areas, which limit productivity and efficiency. Any of these factors could lead to labor market volatility and generally impact income, purchasing power and consumption levels, which could limit growth and ultimately have a material adverse effect on us.

Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may harm the Brazilian economy and the price of our Class A common shares.

The market for securities offered by companies with significant operations in Brazil is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin American and emerging markets, as well as the United States, Europe and other countries. To the extent the conditions of the global markets or economy deteriorate, the business of companies with significant operations in Brazil may be harmed. The weakness in the global economy has been marked by, among other adverse factors, lower levels of consumer and corporate confidence, decreased business investment and consumer spending, increased unemployment, reduced income and asset values in many areas, reduction of China’s growth rate, currency volatility and limited availability of credit and access to capital. Developments or economic conditions in other countries may significantly affect the availability of credit to companies with significant operations in Brazil and result in considerable outflows of funds from Brazil, decreasing the amount of foreign investments in Brazil.

Crises and political instability in other emerging countries, the United States, Europe or other countries could decrease investor demand for securities offered by companies with significant operations in Brazil, such as our Class A common shares. Investor sentiment in one country may cause capital markets in other countries to fluctuate, affecting the value of our Class A common shares, even if indirectly. The economic, political and social instability in the United States, the trade war between the United States and China, crises in Europe and other countries, the consequences of United Kingdom’s exit from the European Union, and global tensions, as well as economic or political crises in Latin America or other emerging markets, including as a result of the COVID-19 pandemic, can significantly affect the perception of the risks inherent in investment in Brazil. In addition, growing economic uncertainty and news of a potentially recessive economy in the United States may also create uncertainty in the Brazilian economy. These developments, as well as potential crises and forms of political instability arising therefrom or any other as of yet unforeseen development, may harm our business and the price of our Class A common shares.

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

We may be harmed by investors’ perceptions of risks related to Brazil’s sovereign debt credit rating. Rating agencies regularly evaluate Brazil and its sovereign ratings, which are based on a number of factors including macroeconomic trends, fiscal and budgetary conditions, indebtedness metrics and the perspective of changes in any of these factors.

 

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The rating agencies began to review Brazil’s sovereign credit rating in September 2015. Subsequently, the three major rating agencies downgraded Brazil’s investment-grade status:

 

   

In 2015, Standard & Poor’s initially downgraded Brazil’s credit rating from BBB-negative to BB-positive and subsequently downgraded it again from BB-positive to BB, maintaining its negative outlook, citing a worse credit situation since the first downgrade. On January 11, 2018, Standard & Poor’s further downgraded Brazil’s credit rating from BB to BB-negative. The BB-negative rating was reaffirmed on February 7, 2019 with a stable outlook, which reflects the agency’s expectations that the Brazilian government will be able to implement policies to gradually improve the fiscal deficit, as well as a mild economic recovery, given improvements in consumer confidence. In April 2020, Standard & Poor’s revised the credit rating for Brazil to BB-negative with a stable outlook.

 

   

In December 2015, Moody’s reviewed and downgraded Brazil’s issue and bond ratings from Baa3 to below investment grade, Ba2 with a negative outlook, citing the prospect of a further deterioration in Brazil’s debt indicators, considering the low growth environment and the challenging political scenario. In April 2018, Moody’s reaffirmed its Ba2 rating, but altered its outlook from “negative” to “stable,” also supported by the projection that the Brazilian government would approve fiscal reforms and that economic growth in Brazil would resume gradually.

 

   

In 2016, Fitch downgraded Brazil’s sovereign credit rating to BB-positive with a negative outlook, citing the rapid expansion of the country’s budget deficit and the worse-than-expected recession. In February 2018, Fitch downgraded Brazil’s sovereign credit rating again to BB-negative, citing, among other reasons, fiscal deficits, the increasing burden of public debt and an inability to implement reforms that would structurally improve Brazil’s public finances. The BB-negative rating was reaffirmed in May 2019. In May 2020, Fitch affirmed Brazil’s long-term foreign currency issuer default rating at BB-negative and revised the rating outlook to negative.

Brazil’s sovereign credit rating is currently rated below investment grade by the three credit rating agencies. Consequently, the prices of securities offered by companies with significant operations in Brazil have been negatively affected. A prolongation or worsening of the current Brazilian recession and continued political uncertainty, among other factors, could lead to further ratings downgrades. Any further downgrade of Brazil’s sovereign credit ratings could heighten investors’ perception of risk and, as a result, cause the trading price of our Class A common shares to decline.

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

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

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

 

   

technological innovations by us or competitors;

 

   

actual or anticipated variations in our operating results;

 

   

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

 

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

 

   

future sales of our shares;

 

   

investor perceptions of us and the industries in which we operate; and

 

   

difficulties experienced by our parent company and/or by any of our associate companies in Brazil, or direct or indirect subsidiaries of our parent company.

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

The market price of our shares may be volatile or may decline sharply or suddenly, regardless of our operating performance, and we may not be able to meet investors’ or analysts’ expectations. You may not be able to resell your shares for the initial offer price or above it and you may lose all or part of your investment.

The initial price of the public offering for our common shares was determined by means of negotiations between the underwriters and ourselves and may vary in relation to the market price of our common shares following this offering. If you purchase our common shares in this offering, you may not be able to resell them at the initial price or at a higher price than that of the public offering. We cannot guarantee that the market price after this offering will be equal to or higher than prices in private traded transactions of our common shares that occurred from time to time prior to the offering. The market price of our common shares may fluctuate or decline significantly in response to a number of factors, many of which are beyond our control, including, but not limited to:

 

   

actual or forecast fluctuations in revenue or in other operating and financial results;

 

   

announcements by us or estimates by third parties of actual or forecast changes in the number of students and partner schools;

 

   

variations between our actual operating results and the expectations of securities analysts, investors and the financial community;

 

   

action by securities analysts who begin or continue to cover us, changes in the financial estimates of any securities analysts who follow our company or our failure to meet these estimates or investors’ expectations;

 

   

announcements by us or by our competitors of significant products or features, technical innovations, acquisitions, strategic partnerships, joint ventures or capital commitments;

 

   

negative media coverage or publicity affecting us or our parent company, whether true or not;

 

   

changes in the operating performance and stock market valuations of education companies in general, or those of our sector in particular, including our competitors;

 

   

fluctuations in the price and volume of the stock market in general, including as a result of trends in the economy as a whole;

 

   

threats of lawsuits and actions brought against us or decided against us;

 

   

developments in the legislation or regulatory action, including interim or final decisions by judicial or regulatory bodies (including any competition authorities that block, delay or subject any of our

 

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acquisitions to significant limitations or restrictions on our ability to operate in one or more markets or that require us to divest our business or the other entity’s business in one or more markets);

 

   

changes in accounting standards, policies, guidelines, interpretations or principles;

 

   

any significant changes to our board of directors or management;

 

   

any security incidents or public reports of security incidents that occur in our platform or in our sector;

 

   

statements, comments or opinions from public officials that our product offerings are or may be illegal, regardless of interim or final decisions of judicial or regulatory bodies; and

 

   

other events or factors, including those resulting from war, terrorist incidents, natural disasters or responses to such events.

In addition, price and volume fluctuations in the stock markets have affected and continue to affect the stock prices of many education companies. Often, their stock prices fluctuate in ways that are unrelated or disproportionate to the operating performance of companies. In some instances, shareholders have filed a class action lawsuit after periods of market volatility. If we are involved in litigation regarding securities, this could subject us to substantial costs, divert resources and management attention from our business and seriously undermine our business. In addition, the occurrence of any of the factors listed above, along with others, may cause our share price to drop significantly and there is no guarantee that our share price will recover. As a result, you may not be able to sell your shares at or above the initial price of the public offering and you may lose some or all of your investment.

Our parent company, our sole shareholder prior to this offering, will own 100% of our outstanding Class B common shares, which represent approximately 97.2% of the voting power of our issued share capital and 77.6% of our total equity ownership following the offering, and will control all matters requiring shareholder approval. Our parent company’s ownership and voting power limits your ability to influence corporate matters.

After this offering, our parent company will continue to control our company, but will not hold any of our Class A common shares. Nevertheless, our parent company will beneficially own 77.6% of our issued share capital (or 75.1% if the underwriters’ option to purchase additional Class A common shares is exercised in full) through its beneficial ownership of all of our outstanding Class B common shares, and consequently, 97.2% of the combined voting power of our issued share capital (or 96.8% of our combined voting power if the underwriters’ option to purchase additional Class A common shares is exercised in full). Our Class B common shares are entitled to 10 votes per share and our Class A common shares, which are the common shares we are offering in this offering, are entitled to one vote per share. Our Class B common shares are convertible into an equivalent number of Class A common shares and generally convert into Class A common shares upon transfer, subject to limited exceptions. As a result, our parent company will control the outcome of all decisions at our shareholders’ meetings and will be able to elect a majority of the members of our board of directors. Our parent company will also be able to direct our actions in areas such as business strategy, financing, distributions, acquisitions and dispositions of assets or businesses. For example, our parent company may cause us to make acquisitions that increase the amount of our indebtedness or outstanding Class A common shares, sell revenue generating assets or inhibit change of control transactions that benefit other shareholders. Our parent company’s decisions on these matters may be contrary to your expectations or preferences, and our parent company may take actions that could be contrary to your interests. Our parent company will be able to prevent any other shareholders, including you, from blocking these actions. For further information regarding shareholdings in our company, see “Principal Shareholders.”

So long as our parent company continue to beneficially own a sufficient number of Class B common shares, even if our parent company beneficially owns significantly less than 50% of our outstanding share capital, our parent company will be able to effectively control our decisions. If our parent company sells or transfers any of

 

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its Class B common shares, such shares will generally convert automatically into Class A common shares, subject to limited exceptions, such as transfers to affiliates, to trustees for the holder or its affiliates and certain transfers to U.S. tax exempt organizations. The fact that any Class B common shares convert into Class A common shares if our parent company sells or transfers them means that our parent company will in many situations continue to control a majority of the combined voting power of our outstanding share capital, due to the voting rights of any Class B common shares that it retains. However, if our Class B common shares at any time represent less than 10% of the total number of shares in the capital of the company outstanding, the Class B common shares then outstanding will automatically convert into Class A common shares. For a description of the dual class structure, see “Description of Share Capital.”

Our status as a controlled company and a foreign private issuer exempts us from certain of the corporate governance standards of the Nasdaq, limiting the protections afforded to investors.

We are a “controlled company” and a “foreign private issuer” within the meaning of the Nasdaq corporate governance standards. Under the Nasdaq rules, a controlled company is exempt from certain Nasdaq corporate governance requirements. In addition, a foreign private issuer may elect to comply with the practice of its home country and not to comply with certain Nasdaq corporate governance requirements, including the requirements that (i) a majority of the board of directors consists of independent directors, (ii) a nominating and corporate governance committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, (iii) a compensation committee be established that is composed entirely of independent directors and has a written charter addressing the committee’s purpose and responsibilities, and (iv) an annual performance evaluation of the nominating and corporate governance and compensation committees be undertaken. Although we have similar practices, they do not entirely conform to the Nasdaq requirements; therefore, we currently use these exemptions and intend to continue using them. Accordingly, you will not have the same protections provided to shareholders of companies that are subject to all Nasdaq corporate governance requirements.

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

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

Following the completion of this offering, we will have outstanding 18,575,492 Class A common shares and 64,436,093 Class B common shares (or 21,361,815 Class A common shares and 64,436,093 Class B common shares, if the underwriters exercise in full their option to purchase additional shares). Subject to the lock up agreements described below, the Class A common shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act by persons other than our affiliates within the meaning of Rule 144 of the Securities Act.

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

 

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

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

Our Articles of Association contain anti-takeover provisions that may discourage a third party from acquiring us and adversely affect the rights of holders of our Class A common shares.

Our Articles of Association contain certain provisions that could limit the ability of others to acquire our control, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain our control in a tender offer or similar transactions.

The price of our Class A common shares may be subject to changes in the price of the shares of our parent company.

Our parent company is a public company and listed in Brazil on the B3. Accordingly, investors may choose to value our Class A common shares considering the business group as a whole, and not just our business on its own. Consequently, any change in the price of the shares of our parent company, whether due to factors such as business decisions, the macroeconomic situation in Brazil, the publication of financial results, or otherwise, may negatively affect its market value and, therefore, have an adverse effect on the price of our Class A common shares.

If securities or industry analysts do not publish reports, or publish inaccurate or unfavorable reports about our business, the price of our Class A common shares and our trading volume could decline.

The trading market for our Class A common shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts currently cover our parent company, but they do not, and may never, publish research on our company. If no or too few securities or industry analysts commence coverage of our company, the trading price for our Class A common shares would likely be negatively affected. If one or more of the analysts who cover us downgrade their target price for our Class A common shares or publish inaccurate or unfavorable reports about our business, the price of our Class A common shares would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our Class A common shares could decrease, which might cause the price of our Class A common shares and trading volume to decline.

We may not pay any cash dividends in the foreseeable future.

We may retain our future earnings, if any, for the foreseeable future, to fund the operation of our business and future growth. As a result, capital appreciation in the price of our Class A common shares, if any, will be your only source of gain on an investment in our Class A common shares.

 

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The requirements of being a public company in the United States may overstretch our resources, result in litigation and divert the attention of management from our business.

This offering will have a significant transformative effect on us. We expect to incur significant additional legal, accounting, reporting and other expenses as a result of having publicly traded Class A common shares. We will also incur costs, including, but not limited to, directors’ fees, increased directors’ and officers’ insurance, investor relations, and various other costs of a public company.

We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under the Securities Exchange Act of 1934, as amended, or the Exchange Act, the Sarbanes-Oxley Act, the Dodd-Frank Wall Street Reform and the Consumer Protection Act, Nasdaq listing requirements and other rules and regulations applying to companies with publicly listed securities. We expect these rules and regulations to increase our legal and financial compliance costs and make some management and corporate governance activities more difficult, time consuming and costly, particularly after we are no longer an “emerging growth company,” increasing the demands on our systems and resources. Among other things, the SEC rules applying to us, require we file annual and current reports on our business and operating results.

These rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. This could have an adverse impact on our ability to recruit and bring on a qualified independent board.

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

In addition, the public reporting obligations associated with being a public company in the United States may subject us to litigation as a result of increased scrutiny of our financial reporting. If we are involved in litigation regarding our public reporting obligations, this could subject us to substantial costs, divert resources and management attention from our business and seriously undermine our business.

Our dual class capital structure means our shares will not be included in certain indices, and this could affect the market price of our Class A shares.

In 2017, FTSE Russell, S&P Dow Jones and MSCI announced changes to their eligibility criteria for inclusion of shares of public companies on certain indices to exclude companies with multiple classes of shares of common stock from being added to such indices. FTSE Russell announced plans to require new constituents of its indices to have at least five percent of their voting rights in the hands of public stockholders, whereas S&P Dow Jones announced that companies with multiple share classes, such as ours, will not be eligible for inclusion in the S&P 500, S&P MidCap 400 and S&P SmallCap 600, which together make up the S&P Composite 1500. MSCI also opened public consultations on their treatment of no vote and multi class structures and has temporarily barred new multi class listings from its ACWI Investable Market Index and U.S. Investable Market 2500 Index. We cannot assure you that other stock indices will not take a similar approach to FTSE Russell, S&P Dow Jones and MSCI in the future. Under the announced policies, our dual class capital structure would make us ineligible for inclusion in any of these indices and, as a result, mutual funds, exchange traded funds and other investment vehicles that attempt to passively track these indices will not invest in our stock. Exclusion from indices could make our Class A common shares less attractive to investors and, as a result, the market price of our Class A common shares could be adversely affected.

 

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The dual class structure of our common stock has the effect of concentrating voting control with our parent company; this will limit or preclude your ability to influence corporate matters.

Each Class A common share, which are the shares being sold in this offering, will entitle its holder to one vote per share, and each Class B common share will entitle its holder to ten votes per share, so long as the total number of the issued and outstanding Class B common shares is at least 10% of the total number of shares outstanding. Due to the ten to one voting ratio between our Class B and Class A common shares, the beneficial owner of our Class B common shares collectively will continue to control the voting power of our common shares after the completion of this offering and therefore be able to control all matters submitted to our shareholders.

In addition, our Articles of Association provide that at any time when there are Class A common shares in issue, additional Class B common shares may only be issued pursuant to (1) a share split, subdivision of shares or similar transaction or where a dividend or other distribution is paid by the issue of shares or rights to acquire shares or following capitalization of profits, (2) a merger, consolidation, or other business combination involving the issuance of Class B common shares as full or partial consideration, or (3) an issuance of Class A common shares, whereby holders of the Class B common shares are entitled to purchase a number of Class B common shares that would allow them to maintain their proportional ownership interests in Vasta (following an offer by us to each holder of Class B common shares to issue to such holder, upon the same economic terms and at the same price, such number of Class B common shares as would ensure such holder may maintain a proportional ownership interest in Vasta pursuant to our Articles of Association).

Future transfers by holders of Class B common shares will generally result in those shares converting to Class A common shares, subject to limited exceptions, such as certain transfers effected to permitted transferees or for estate planning or charitable purposes. The conversion of Class B common shares to Class A common shares will have the effect, over time, of increasing the relative voting power of those holders of Class B common shares who retain their shares in the long term.

This concentrated control will limit or preclude your ability to influence corporate matters for the foreseeable future. For a description of our dual class structure, see “Description of Share Capital—Voting Rights.”

We are a Cayman Islands exempted company with limited liability. The rights of our shareholders, including with respect to fiduciary duties and corporate opportunities, may be different from the rights of shareholders governed by the laws of U.S. jurisdictions.

We are a Cayman Islands exempted company with limited liability. Our corporate affairs are governed by our Articles of Association and by the laws of the Cayman Islands. The rights of shareholders and the responsibilities of members of our board of directors may be different from the rights of shareholders and responsibilities of directors in companies governed by the laws of U.S. jurisdictions. In particular, as a matter of Cayman Islands law, directors of a Cayman Islands company owe fiduciary duties to the company and separately a duty of care, diligence and skill to the company. Under Cayman Islands law, directors and officers owe the following fiduciary duties: (1) duty to act in good faith in what the director or officer believes to be in the best interests of the company as a whole; (2) duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose; (3) directors should not properly fetter the exercise of future discretion; (4) duty to exercise powers fairly as between different sections of shareholders; (5) duty to exercise independent judgment; and (6) duty not to put themselves in a position in which there is a conflict between their duty to the company and their personal interests. Our Articles of Association have varied this last obligation by providing that a director must disclose the nature and extent of his or her interest in any contract or arrangement, and following such disclosure and subject to any separate requirement under applicable law or the listing rules of the Nasdaq, and unless disqualified by the chairman of the relevant meeting, such director may vote in respect of any transaction or arrangement in which he or she is interested and may be counted in the quorum at the meeting.

 

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Conversely, under Delaware corporate law, a director has a fiduciary duty to the corporation and its stockholders and the director’s duties prohibits self-dealing by a director and mandates that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. For more information, see “Description of Share Capital—Principal Differences between Cayman Islands and U.S. Corporate Law.”

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

The initial public offering price of our Class A common shares will be substantially higher than the pro forma net tangible book value per share of the outstanding Class A common shares immediately after the offering. Based on an initial public offering price of US$19.00 per share and our net tangible book value as of December 31, 2019 if you purchase our Common shares in this offering you will pay more for your shares than the amounts paid by our existing shareholder for its shares and you will suffer immediate dilution of approximately US$19.46 per share in pro forma net tangible book value. As a result of this dilution, investors purchasing shares in this offering may receive significantly less than the full purchase price that they paid for the shares purchased in this offering in the event of a liquidation. For more information, see “Dilution.”

We may need to raise additional capital in the future by issuing securities, use our Class A common shares as acquisition consideration, or may enter into corporate transactions with an effect similar to a merger, which may dilute your interest in our share capital, change the nature of our business, and/or affect the trading price of our Class A common shares.

We may need to raise additional funds to grow our business, including through acquisitions, and implement our growth strategy going forward by engaging in public or private issuances of common shares or securities convertible into, or exchangeable for, our common shares, which may dilute your interest in our share capital or result in a decrease in the market price of our common shares. Any fundraising through the issuance of shares or securities convertible into or exchangeable for shares, the use of our Class A common shares as acquisition consideration, or the participation in corporate transactions with an effect similar to a merger, may dilute your interest in our capital stock, change the nature of our business from the business that you originally invested in (including as a result of merger or acquisition transactions), and/or result in a decrease in the market price of our Class A common shares.

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

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

As a foreign private issuer and an “emerging growth company” (as defined in the JOBS Act), we will have different disclosure and other requirements from U.S. domestic registrants and non-emerging growth companies. We may take advantage of exemptions from certain corporate governance regulations of the Nasdaq, and this may result in less protection for the holders of our Class A common shares.

As a foreign private issuer and emerging growth company, we may be subject to different disclosure and other requirements than domestic U.S. registrants and non-emerging growth companies. For example, as a foreign private issuer, in the United States, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports on

 

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Form 10 Q or to file current reports on Form 8 K upon the occurrence of specified significant events, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short swing profit rules applicable to domestic U.S. registrants under Section 16 of the Exchange Act. In addition, we intend to rely on exemptions from certain U.S. rules which will permit us to follow Cayman Islands legal requirements rather than certain of the requirements that are applicable to U.S. domestic registrants.

We will follow Cayman Islands laws and regulations that are applicable to Cayman Islands companies. However, Cayman Islands laws and regulations applicable to Cayman Islands companies do not contain any provisions comparable to the U.S. proxy rules, the U.S. rules relating to the filing of reports on Form 10-Q or 8-K or the U.S. rules relating to liability for insiders who profit from trades made in a short period of time, as referred to above.

Furthermore, foreign private issuers are required to file their annual report on Form 20 F within 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10 K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information, although we will be subject to Cayman Islands laws and regulations having substantially the same effect as Regulation Fair Disclosure. As a result of the above, even though we are required to file reports on Form 6 K disclosing the limited information which we have made or are required to make public pursuant to Cayman Islands law, or are required to distribute to shareholders generally, and that is material to us, you may not receive information of the same type or amount that is required to be disclosed to shareholders of a U.S. company.

In addition, according to Section 303A of the Section 5605 of the Nasdaq equity rules listed companies are required, among other things, to have a majority of independent board members, and to have independent director oversight of executive compensation, nomination of directors and corporate governance matters. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. For more information, see the section “Description of Share Capital—Principal Differences between Cayman Islands and U.S. Corporate Law.”

The JOBS Act contains provisions that, among other things, relax certain reporting requirements for emerging growth companies. Under this act, as an emerging growth company, we will not be subject to the same disclosure and financial reporting requirements as non-emerging growth companies. For example, as an emerging growth company we are permitted to, and intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Also, we will not have to comply with future audit rules promulgated by the U.S. Public Company Accounting Oversight Board, or PCAOB (unless the SEC determines otherwise), and our auditors will not need to attest to our internal controls under Section 404(b) of the Sarbanes Oxley Act. We may follow these reporting exemptions until we are no longer an emerging growth company. As a result, our shareholders may not have access to certain information that they deem important. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual revenue of at least US$1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our Class A common shares that is held by non-affiliates exceeds US$700.0 million as of the prior June 30, and (2) the date on which we have issued more than US$1.07 billion in non-convertible debt during the prior three year period. Accordingly, the information about us available to you will not be the same as, and may be more limited than, the information available to shareholders of a non-emerging growth company. We could be an “emerging growth company” for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our Class A common shares held by non-affiliates exceeds US$700 million as of any June 30 (the end of our second fiscal quarter) before that time, in which case we would no longer be an “emerging growth company” as of the following December 31 (our fiscal year end). We cannot predict if investors will find our Class A common shares less attractive because we may rely on these exemptions. If some investors find our Class A common shares less

 

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attractive as a result, there may be a less active trading market for our Class A common shares and the price of our Class A common shares may be more volatile.

We may lose our foreign private issuer status which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting and other expenses.

In order to maintain our current status as a foreign private issuer, either (a) more than 50% of our Class A common shares must be either directly or indirectly owned of record by nonresidents of the United States or (b)(1) a majority of our executive officers or directors may not be U.S. citizens or residents, (2) more than 50% of our assets cannot be located in the United States and (3) our business must be administered principally outside the United States. If we lose this status, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC and Nasdaq rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the costs we will incur as a foreign private issuer.

Our shareholders may face difficulties in protecting their interests because we are a Cayman Islands exempted company.

Our corporate affairs are governed by our Articles of Association, by the Companies Law (as amended) of the Cayman Islands and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under the laws of the Cayman Islands are not as clearly defined as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, you may have more difficulty protecting your interests than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less formal nature of Cayman Islands law in this area.

While Cayman Islands law allows a dissenting shareholder to express the shareholder’s view that a court sanctioned reorganization of a Cayman Islands company would not provide fair value for the shareholder’s shares, Cayman Islands statutory law does not specifically provide for shareholder appraisal rights in connection with a merger or consolidation of a company that takes place by way of a scheme of arrangement. This may make it more difficult for you to assess the value of any consideration you may receive in such a merger or consolidation or to require that the acquirer gives you additional consideration if you believe the consideration offered is insufficient. However, Cayman Islands statutory law provides a mechanism for a dissenting shareholder in a merger or consolidation that does not take place by way of a scheme of arrangement to apply to the Grand Court for a determination of the fair value of the dissenter’s shares if it is not possible for the company and the dissenter to agree on a fair price within the time limits prescribed.

Shareholders of Cayman Islands exempted companies have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders. Our directors have discretion under our Articles of Association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.

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

United States civil liabilities and certain judgments obtained against us by our shareholders may not be enforceable.

We are a Cayman Islands exempted company and substantially all of our assets are located outside of the United States. In addition, the majority of our directors and officers are nationals and residents of countries other

 

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than the United States. A substantial portion of the assets of these persons is located outside of the United States. As a result, it may be difficult to effect service of process within the United States upon these persons. It may also be difficult to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors who are not resident in the United States and the substantial majority of whose assets are located outside of the United States.

We have been advised by our Cayman Islands legal counsel, Maples and Calder, that the courts of the Cayman Islands are unlikely (i) to recognize or enforce against us judgments of courts of the United States predicated upon the civil liability provisions of the securities laws of the United States or any State; and (ii) in original actions brought in the Cayman Islands, to impose liabilities against us predicated upon the civil liability provisions of the securities laws of the United States or any State, to the extent that the liabilities imposed by those provisions are penal in nature. In those circumstances, although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, the courts of the Cayman Islands will recognize and enforce a foreign money judgment of a foreign court of competent jurisdiction without retrial on the merits based on the principle that a judgment of a competent foreign court imposes upon the judgment debtor an obligation to pay the sum for which judgment has been given provided certain conditions are met. For a foreign judgment to be enforced in the Cayman Islands, such judgment must be final and conclusive and for a liquidated sum, and must not be in respect of taxes or a fine or penalty, inconsistent with a Cayman Islands judgment in respect of the same matter, impeachable on the grounds of fraud or obtained in a manner, and or be of a kind the enforcement of which is, contrary to natural justice or the public policy of the Cayman Islands (awards of punitive or multiple damages may well be held to be contrary to public policy). A Cayman Islands Court may stay enforcement proceedings if concurrent proceedings are being brought elsewhere.

Judgments of Brazilian courts to enforce our obligations with respect to our Class A common shares may be payable only in reais. The exchange rate in force at the time may not offer non-Brazilian investors full compensation for any claim arising from our obligations.

Most of our assets are located in Brazil. If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of our Class A common shares, we may not be required to discharge our obligations in a currency other than the real. Under Brazilian exchange control laws, an obligation in Brazil to pay amounts denominated in a currency other than the real may only be satisfied in Brazilian currency at the exchange rate, as determined by the Central Bank, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the Class A common shares.

Our Class A common shares may not be a suitable investment for all investors, as investment in our Class A common shares presents risks and the possibility of financial losses.

The investment in our Class A common shares is subject to risks. Investors who wish to invest in our Class A common shares are thus subject to asset losses, including loss of the entire value of their investment, as well as other risks, including those related to our Class A common shares, us, the sector in which we operate, our shareholder structure and the general macroeconomic environment in Brazil, among other risks.

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

 

   

have sufficient knowledge and experience to make a meaningful evaluation of our Class A common shares, the merits and risks of investing in our Class A common shares and the information contained in this prospectus;

 

   

have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in our Class A common shares and the impact our Class A common shares will have on its overall investment portfolio;

 

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have sufficient financial resources and liquidity to bear all of the risks of an investment in our Class A common shares;

 

   

understand thoroughly the terms of our Class A common shares and be familiar with the behavior of any relevant indices and financial markets; and

 

   

be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.

The Cayman Islands Economic Substance Law may affect our operations.

The Cayman Islands has recently enacted the International Tax Co-operation (Economic Substance) Law (2020 Revision), or the Cayman Economic Substance Law. We are required to comply with the Cayman Economic Substance Law. As we are a Cayman Islands company, compliance obligations include filing annual notifications for us, which need to state whether we are carrying out any relevant activities and, if so, whether we have satisfied economic substance tests to the extent required under the Cayman Economic Substance Law. As it is a relatively new regime, it is anticipated that the Cayman Economic Substance Law will evolve and be subject to further clarification and amendments. We may need to allocate additional resources to keep updated with these developments, and may have to make changes to our operations in order to comply with all requirements under the Cayman Economic Substance Law. Failure to satisfy these requirements may subject us to penalties under the Cayman Economic Substance Law.

The Cayman Islands Tax Information Authority shall impose a penalty of CI$10,000 (or US$12,500) on a relevant entity for failing to satisfy the economic substance test or CI$100,000 (or US$125,000) if it is not satisfied in the subsequent financial year after the initial notice of failure. Following failure after two consecutive years the Grand Court of the Cayman Islands may make an order requiring the relevant entity to take specified action to satisfy the economic substance test or ordering it that it is defunct or be struck off.

Lastly, on February 18, 2020, it was announced that the Cayman Islands has been placed on the list of non-cooperative jurisdictions published by the European Union, or EU, for tax purposes. The Cayman Islands government issued a press release on February 18, 2020 affirming that the jurisdiction introduced appropriate legislative changes on February 7, 2020 relating to the EU’s criteria, but that the listing appears to stem from such legislation not being enacted by February 4, 2020, which was the date of the EU’s Code of Conduct Group meeting to advise the EU Finance Ministers prior to the Finance Ministers’ decision regarding the listing on February 18, 2020. The Cayman Islands government press release states that the Cayman Islands remains fully committed to cooperating with the EU, and will continue to constructively engage with them with the view to be delisted as soon as possible. It is unclear as to whether the Cayman Islands being placed on such list will have a significant, or any, effect on us.

 

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PRESENTATION OF FINANCIAL AND OTHER INFORMATION

All references to “U.S. dollars,” “dollars” or “$” are to the U.S. dollar. All references to “real,” “reais,” “Brazilian real,” “Brazilian reais,” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “IFRS” are to International Financial Reporting Standards, as issued by the International Accounting Standards Board, or the IASB.

Financial Statements

Vasta, the company whose Class A common shares are being offered in this prospectus, was incorporated on October 16, 2019, as a Cayman Islands exempted company with limited liability duly registered with The General Registry of the Cayman Islands.

We maintain our books and records in Brazilian reais, the presentation currency for our financial statements and also the functional currency of our operations in Brazil. We prepare our annual consolidated financial statements in accordance with IFRS, as issued by the IASB. Unless otherwise noted, financial information presented herein is stated in Brazilian reais, our reporting currency.

Due to the Acquisition and our corporate reorganization as described under “—Corporate Events—Our Incorporation and Corporate Reorganization,” the financial information contained in this prospectus is derived from the following financial information, including the notes thereto:

 

   

The unaudited interim condensed combined financial statements of the Successor as of March 31, 2020 and for the three months ended March 31, 2020 and unaudited interim condensed combined carve-out financial statements for the three months ended March 31, 2019, included elsewhere in this prospectus, or our unaudited interim condensed combined financial statements;

 

   

The audited combined carve-out financial statements of the Successor as of December 31, 2019 and for the period from October 11 to December 31, 2018, included elsewhere in this prospectus;

 

   

The audited combined carve-out financial statements of the Successor as of December 31, 2018 and October 11, 2018, and for the period from October 11 to December 31, 2018 included elsewhere in this prospectus; and

 

   

The audited combined carve-out financial statements of the Predecessors as of December 31, 2017 and January 1, 2017, and for the period from January 1 to October 10, 2018 and for the year ended December 31, 2017 included elsewhere in this prospectus.

All references herein to “the audited combined carve-out financial statements” or to “the unaudited interim condensed consolidated carve-out financial statements” are to the financial information described above, as the case may be, included elsewhere in this prospectus.

The Predecessors’, the Successor’s and our fiscal year end on December 31. References in this prospectus to a fiscal year, such as “fiscal year 2019,” relate to our fiscal year ended on December 31 of that calendar year.

Corporate Events

Our Incorporation and Corporate Reorganization

We are a Cayman Islands exempted company incorporated with limited liability on October 16, 2019 for purposes of undertaking our initial public offering, fully owned by Cogna on the date hereof.

On October 11, 2018, Saber, a subsidiary of Cogna (formerly known as Kroton Educacional S.A.), our parent company, and a Brazilian publicly-listed company in the Novo Mercado segment of B3 S.A.—Brasil,

 

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Bolsa, Balcão, or B3, with no controlling shareholder, acquired control over Somos Educação S.A., or Somos Educação, and together with its subsidiaries, the “Somos Group,” for R$6.2 billion, which we refer to herein as the “Acquisition.” Following the Acquisition, Cogna began managing the Somos Group’s K-12 curriculum businesses and since October 2019 Cogna has adopted the Vasta brand for its B2B K-12 business, representing the combination of the K-12 curriculum businesses held by the Predecessors. Consequently, the Acquisition created a new basis of accounting for the Somos Group, using the acquisition method of accounting to record assets acquired and liabilities purchased. This accounting treatment generally results in increased amortization and depreciation reported in future periods. Accordingly, the accompanying combined carve-out financial statements of the Predecessors and Vasta are not comparable in all material respects since those financials statements report financial position, results of operations, and cash flows of these separate businesses. Upon the Acquisition, the Somos Group, along with Pitágoras, came under the indirect common control of Cogna (and with the completion of the corporate reorganization (as defined below), came under the direct control of Vasta).

In this prospectus, we refer to the reorganization of our K-12 B2B business and the structuring of related subsidiaries (including the Contribution (as defined below)) under Vasta as the “corporate reorganization.”

At the time of the issuer’s incorporation, Cogna indirectly held a 100% ownership interest in the Somos Group and, together with its wholly-owned subsidiary EDE, a 100% ownership interest in Saber (7.44% held directly, with the other 92.56% held indirectly). Saber directly and indirectly held a 100% ownership interest in Somos Educação, which in turn held the Somos Group’s K-12 curriculum business. Also, Saber held the K-12 business operated as Pitágoras. In addition, before the implementation of the corporate reorganization, the Somos Group carried out activities or owned assets or liabilities that were not within the scope of Vasta’s business. Such activities, assets or liabilities have already been or will be segregated from the Somos Group into Cogna prior to the consummation of this offering, through one or more corporate or contractual arrangements which include spin-offs, incorporations, capital reductions, purchase and sale of assets or assignment of liabilities, or capitalization of debts among the entities of the Somos Group, Saber, Cogna, EDE or other subsidiaries of Cogna.

On December 17, 2019, following a capital increase approved at Saber’s general shareholders meeting, Cogna increased its equity interest in Saber upon the capitalization into Saber of indebtedness due by Saber to it, in the amount of R$5.5 billion. As of the date hereof, Cogna directly holds a 63.87% ownership interest in Saber and continues to hold the remaining 36.13% ownership interest indirectly, for a 100.0% direct and indirect ownership interest.

On December 31, 2019, following the spin-off of the Pitágoras K-12 business from Saber and the merger of the related assets and liabilities into Somos Sistemas de Ensino S.A., or Somos Sistemas, Cogna became the direct owner of a 100% ownership interest in Somos Sistemas. As of the date hereof, Cogna directly holds a 62% ownership interest in Saber and continues to hold the remaining 38% ownership interest indirectly.

Prior to the consummation of this offering, Cogna will consummate the Contribution, which will be accounted for at historical book value, in return for new Class B common shares issued by Vasta in a one-to-58 exchange for the shares of Somos Sistemas contributed to us.

Until the Contribution of Somos Sistemas’ shares to us, we will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments. Following the Contribution, Saber will continue to own and operate, directly or through other subsidiaries, certain K-12 businesses as a subsidiary of Cogna, including the operation of its own K-12 private schools and the sales of textbooks under the PNLD, which are separate from Vasta’s business.

After accounting for the new Class A common shares that will be issued and sold by us in this offering, we will have a total of 83,011,585 common shares issued and outstanding immediately following this offering, 64,436,093 of these shares will be Class B common shares beneficially owned by Cogna (which will hold 97.2%

 

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of the combined voting power of our outstanding Class A and Class B common shares), and 18,575,492 of these shares will be Class A common shares beneficially owned by investors purchasing in this offering (which will hold 2.8% of the combined voting power of our outstanding Class A and Class B common shares).

Acquisition of Pluri Educacional

On October 15, 2018, we signed a purchase intention agreement for the acquisition of Pluri Educacional A&R Comércio e Serviços de Informática Ltda. for R$27.8 million. Pluri Educacional, based in the State of Recife, is an entity specialized in solutions, including consulting and technologies for education systems. This acquisition is in line with our strategy of focusing on the distribution of our operations to other regions. This acquisition was consummated in January 2020.

Acquisition of MindMakers

On February 13, 2020, we entered into a purchase agreement to purchase the entire ownership interest of Mind Makers Editora Educacional Ltda., or MindMakers, a company that offers computer programming and robotics courses and helps students develop skills relevant to their educational progress, such as coding and product development, as well as entrepreneurial and socio-emotional skills including teamwork, leadership and perseverance. The total purchase price was R$18.2 million, R$10.0 million of which was payable upon signing the agreement, with half of the remaining balance payable in 2021 and the other half of the remaining balance payable in 2022, with the 2021 and 2022 payments subject to certain adjustments. The agreement is also subject to certain additional earn-outs that could increase the purchase price by and additional R$5.4 million over the life of the earn-out period.

Financial Information in U.S. Dollars

Solely for the convenience of the reader, we have translated some of the real amounts included in this prospectus from Reais into U.S. dollars. You should not construe these translations as representations by us that the amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated. Unless otherwise indicated, we have translated real amounts into U.S. dollars using a rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars at March 31, 2020 as reported by the Central Bank. See “Exchange Rates” for more detailed information regarding translation of Reais into U.S. dollars and for historical exchange rates for the Brazilian real.

Special Note Regarding Non-GAAP Financial Measures

EBITDA, Adjusted EBITDA, Free Cash Flow and Adjusted Cash Conversion Ratio

This prospectus presents our EBITDA, Adjusted EBITDA, Free Cash Flow and Adjusted Cash Conversion Ratio information for the convenience of investors. EBITDA, Adjusted EBITDA, Free Cash Flow and Adjusted Cash Conversion Ratio are the key performance indicators used by us to measure financial operating performance. Our management believes that these Non-GAAP financial measures provide useful information to investors and shareholders. We also use these measures internally to establish budgets and operational goals to manage and monitor our business, evaluate our underlying historical performance and business strategies and to report our results to the board of directors.

We calculate EBITDA as Net profit (loss) for the period / year plus income taxes and social contribution

plus/minus net finance result plus depreciation and amortization. The EBITDA measure provides useful information to assess our operational performance.

We calculate Adjusted EBITDA as EBITDA plus/minus: (a) share-based compensation expenses, mainly due to the grant of additional shares to Somos’ employees in connection with the change of control of Somos to

 

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Cogna (for further information refer to note 20 to the audited combined carve-out financial statements of Somos—Anglo); and (b) provision for risks of tax, civil and labor losses regarding penalties, related to income tax positions taken by the Predecessor Somos—Anglo and the Successor in connection with a corporate reorganization carried out by the Predecessor Somos—Anglo (for further information refer to note 20 to the audited combined carve-out financial statements of Somos—Anglo). We understand that such adjustments are relevant and should be considered when calculating our Adjusted EBITDA, which is a practical measure to assess our operational performance that allows us to compare it with other companies that operates in the same segment.

We calculate Free Cash Flow as the net cash flows from operating activities as presented in the statement of cash flows of our financial statements less cash flows required for: (i) acquisition of property, plant and equipment; (ii) addition to intangible assets; and (iii) acquisition of subsidiaries. We consider Free Cash Flow to be a liquidity measure, therefore, we adjust our Free Cash Flow metric with amounts that directly impacted the cash flows in the period in addition to the operating activities. The Free Cash Flow measure provides useful information to management and investors about the amount of cash generated by our operations, deducting for investments in property and equipment to maintain and grow our business.

We calculate Adjusted Cash Conversion Ratio as the cash flows from operating activities divided by Adjusted EBITDA for the relevant period.

We understand that, although EBITDA, Adjusted EBITDA, Free Cash Flow and Adjusted Cash Conversion Ratio are used by investors and securities analysts in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results of operations as reported under IFRS. Additionally, our calculations of Adjusted EBITDA, Free Cash Flow and Adjusted Cash Conversion Ratio may be different from the calculation used by other companies, including our competitors in the education services industry, and therefore, our measures may not be comparable to those of other companies.

For a reconciliation of our non-GAAP financial measures, see “Selected Financial and Other Information—Reconciliations for Non-GAAP Financial Measures.”

Special Note Regarding ACV Bookings

This prospectus presents our ACV Bookings for the convenience of investors. This operating metric is not prepared in accordance with IFRS. ACV Bookings is a non-accounting managerial metric and represents our partner schools’ commitment to pay for our solutions offerings. We believe it is a meaningful indicator of demand for our solutions. In particular, we believe ACV Bookings is a helpful metric because it is designed to show amounts that we expect to be recognized as revenue from subscription services for the 12-month period between October 1 of one fiscal year through September 30 of the following fiscal year. We generally deliver our educational materials to our schools for their convenience in the last calendar quarter of each year, so that our schools can prepare their classes in advance prior to the start of the following school year in January. As a result, our results of operations for the last quarter of a given fiscal year contain revenue relating to the following school year relating to the content that has been delivered prior to the start of the new fiscal year. Therefore, ACV Bookings conveys information that has predictive value for subsequent months, and which may not be as clearly conveyed or understood by simply analyzing our revenue in our statements of income, especially in view of our recent growth.

We define ACV Bookings as the revenue we would expect to recognize from a partner school in each school year, based on the number of students who have contracted our services, or “enrolled students,” that will access our content at such partner school in such school year. We calculate ACV Bookings by multiplying the number of enrolled students at each school with the average ticket per student per year; the related number of enrolled students and average ticket per student per year are each calculated in accordance with the terms of each contract

 

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with the related school. Although our contracts with our schools are typically for 4-year terms, we record one year of revenue under such contracts as ACV Bookings. For example, if a school enters into a 4-year contract with us to provide one of our Core & EdTech platform solutions (such as learning systems or PAR) to 100 students for a contractual fee of US$100 per student per year, we record US$10,000 as ACV Bookings, not US$40,000. ACV Bookings are calculated based on the sum of actual contracts signed during the sales period and assumes the historical rates of returned goods from customers for the preceding 24-month period. Since the actual rates of returned goods from sales during the period may be different from the historical average rates and the actual volume of merchandise ordered by our customers may be different from the contracted amount, the actual revenue recognized during each period of a sales cycle may be different from the ACV Bookings for the respective sales cycle. Our reported ACV Bookings are subject to risks associated with, among other things, economic conditions and the markets in which we operate, including risks that our contracts may be canceled or adjusted (including as a result of the COVID-19 pandemic). See “Risk Factors—Certain Factors Relating to Our Business and Industry—Our operations and results may be negatively impacted by the COVID-19 pandemic.”

Market Share and Other Information

This prospectus contains data related to economic conditions in the market in which we operate. The information contained in this prospectus concerning economic conditions is based on publicly available information from third-party sources that we believe to be reasonable. Market data and certain industry forecast data used in this prospectus were obtained from internal reports and studies, where appropriate, as well as estimates, market research, publicly available information (including information available from the United States Securities and Exchange Commission website) and industry publications. We obtained the information included in this prospectus relating to the industry in which we operate, as well as the estimates concerning market shares, through internal research, public information and publications on the industry prepared by official public sources, such as the Central Bank, the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or IBGE, the Brazilian Ministry of Education (Ministério da Educação), or MEC, the Anísio Teixeira National Institute of Educational Studies and Research (Instituto Nacional de Estudos e Pesquisas Educacionais Anísio Teixeira), or INEP, the School Census (Censo Escolar), the NCES, and the Brazilian Economic Institute of Fundação Getúlio Vargas (Instituto Brasileiro de Economia da Fundação Getúlio Vargas), or FGV/IBRE as well as private sources, such as the report by Oliver Wyman that was commissioned by us.

Industry publications, governmental publications and other market sources, including those referred to above, generally state that the information they include has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Except as disclosed in this prospectus, none of the publications, reports or other published industry sources referred to in this prospectus were commissioned by us or prepared at our request. Except as disclosed in this prospectus, we have not sought or obtained the consent of any of these sources to include such market data in this prospectus.

Rounding

We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This prospectus contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in this prospectus can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “estimate” and “potential,” among others.

Forward-looking statements appear in a number of places in this prospectus and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to of various factors, including, but not limited to, those identified under the section entitled “Risk Factors” in this prospectus. These risks and uncertainties include factors relating to:

 

   

general economic, financial, political, demographic and business conditions in Brazil, as well as any other countries we may serve in the future and their impact on our business;

 

   

fluctuations in interest, inflation and exchange rates in Brazil and any other countries we may serve in the future;

 

   

our ability to implement our business strategy and expand our portfolio of products and services;

 

   

our ability to adapt to technological changes in the educational sector;

 

   

the availability of government authorizations on terms and conditions and within periods acceptable to us;

 

   

our ability to continue attracting and retaining new partner schools and students;

 

   

our ability to maintain the academic quality of our programs;

 

   

the availability of qualified personnel and the ability to retain such personnel;

 

   

changes in the financial condition of the students enrolling in our programs in general and in the competitive conditions in the education industry;

 

   

our capitalization and level of indebtedness;

 

   

the interests of our controlling shareholder;

 

   

changes in government regulations applicable to the education industry in Brazil;

 

   

government interventions in education industry programs, that affect the economic or tax regime, the collection of tuition fees or the regulatory framework applicable to educational institutions;

 

   

cancellations of contracts within the solutions we characterize as subscription arrangements or limitations on our ability to increase the rates we charge for the services we characterize as subscription arrangements;

 

   

our ability to compete and conduct our business in the future;

 

   

our ability to anticipate changes in the business, changes in regulation or the materialization of existing and potential new risks;

 

   

the success of operating initiatives, including advertising and promotional efforts and new product, service and concept development by us and our competitors;

 

   

changes in consumer demands and preferences and technological advances, and our ability to innovate to respond to such changes;

 

   

changes in labor, distribution and other operating costs;

 

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our compliance with, and changes to, government laws, regulations and tax matters that currently apply to us;

 

   

the effectiveness of our risk management policies and procedures, including our internal control over financial reporting;

 

   

health crises, including due to pandemics such as the COVID-19 pandemic and government measures taken in response thereto;

 

   

other factors that may affect our financial condition, liquidity and results of operations; and

 

   

other risk factors discussed under “Risk Factors.”

Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.

 

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USE OF PROCEEDS

We estimate that the net proceeds from our issuance and sale of 18,575,492 shares of our Class A common shares in this offering will be approximately US$328.8 million (or US$378.9 million if the underwriters exercise in full their option to purchase additional shares) after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.

We intend to:

 

   

use approximately one half of the net proceeds from this offering to repay part of the debt owed to our parent company. As of March 31, 2020, we had outstanding debt owed to our parent company in the amount of R$1.6 billion, which matures on August 15, 2023 and bears average interest of CDI + 1.15% per annum. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness” and “Related Party Transactions—Private Debentures” for further information with respect to the debt we expect to repay with the net proceeds from this offering; and

 

   

use the other half of the net proceeds to fund expansion through acquisitions or investments in complementary businesses, products or technologies (including to pay the balance of the purchase price of MindMakers; see “Presentation of Financial and Other Information—Corporate Events”). We will have broad discretion in allocating this portion of the net proceeds from this offering.

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

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

 

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DIVIDENDS AND DIVIDEND POLICY

We have not adopted a dividend policy with respect to future distributions of dividends. The amount of any distributions will depend on many factors such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors and, where applicable, our shareholders.

As a holding company, our ability to pay dividends depends on our receipt of cash dividends from our operating subsidiaries, which may further restrict our ability to pay dividends as a result of the laws of Brazil (including imposing legal restrictions on dividend distribution by subsidiaries), agreements of our subsidiaries or covenants under future indebtedness that we or they may incur. Our ability to pay dividends is therefore directly related to positive and distributable net results from our Brazilian subsidiaries. See “Risk Factors—Certain Factors Relating to Our Business and Industry—We depend on our subsidiaries’ financial results, and we may be adversely affected if the performance of our subsidiaries is not positive or if Brazil imposes legal restrictions on, or imposes taxes on, the distribution of dividends by subsidiaries.”

The terms of our existing indebtedness do not restrict our ability to pay dividends. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Indebtedness.”

Certain Cayman Islands and Brazilian Legal Requirements Related to Dividends

Under the Companies Law and our Articles of Association, a Cayman Islands company may pay a dividend out of either its profit or share premium account, but a dividend may not be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. According to our Articles of Association, dividends can be declared and paid out of funds lawfully available to us, which include the share premium account. Dividends, if any, would be paid in proportion to the number of common shares a shareholder holds. For further information, see “Taxation—Cayman Islands Tax Considerations.”

 

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CAPITALIZATION

The table below sets forth our total capitalization (defined as non-current bonds and financing and parent’s net investment) as of March 31, 2020, as follows:

 

   

historical carve-out financial information of Vasta, on an actual basis;

 

   

Vasta, as adjusted for (1) the Contribution, by which our parent company, Cogna, will contribute the entirety of the shares of Somos Sistemas held by Cogna to Vasta. The Contribution will be accounted for at historical book value, in return for new Class B common shares issued by Vasta in a one-to-58 exchange for the shares of Somos Sistemas contributed to us, and (2) the capital increase of US$450 thousand carried out on July 17, 2020 by our parent company, Cogna. Until the Contribution of Somos Sistemas’ shares to us, we will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments. See “Summary—Our Corporate Structure—Our Incorporation and Corporate Reorganization;” and

 

   

Vasta, as further adjusted for the Contribution and the offering to give effect to the issuance and sale by Vasta of the Class A common shares in the offering, and the receipt of approximately US$328.8 million (R$1,704.3 million, using an exchange rate of R$5.183 to US$1.00, the commercial selling rate for U.S. dollars as of July 30, 2020 as reported by the Central Bank) in estimated net proceeds, considering an offering price of US$19.00 (R$98.48, using an exchange rate of R$5.183 to US$1.00, the commercial selling rate for U.S. dollars as of July 30, 2020 as reported by the Central Bank) per Class A common share, after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, and the use of proceeds therefrom (and assuming no exercise of the underwriters’ option to purchase additional shares and placement of all offered Class A common shares).

Investors should read this table in conjunction with our unaudited interim condensed combined financial statements as of March 31, 2020 and the related notes included elsewhere in this prospectus, with the sections of this prospectus entitled “Selected Financial and Other Information,” with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with other financial information contained in this prospectus.

 

     As of March 31, 2020  
     Vasta, actual      Vasta, as adjusted for
capital increase and
the contribution(2)
     Vasta, as further
adjusted for the
offering(3)
 
     (in US$
millions)(1)
     (in R$
millions)
     (in US$
millions)(1)
     (in R$
millions)
     (in US$
millions)(1)
     (in R$
millions)
 
Non current bonds and financing      234.1        1,217.2        234.1        1,217.2        234.1        1,217.2  

Non current lease liabilities

     28.3        146.9        28.3        146.9        28.3        146.9  

Parent’s net investment(4)(5)

     600.7        3,123.2        601.2        3,125.6        929.0        4,829.9  

Parent’s net investment

     600.7        3,123.2        —          —          —          —    

Class A Common shares

     —          —          —          —          327.8        1,704.3  

Class B Common shares

     —          —          601.2        3,125.6        601.2        3,125.6  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total capitalization(5)

     863.1        4,487.2        863.6        4,489.7        1,191.4        6,194.0  
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)

For convenience purposes only, amounts in reais as of March 31, 2020 have been translated to U.S. dollars at the exchange rate of R$5.199 to US$1.00. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” and “Presentation of Financial and Other Information” for further information about recent fluctuations in exchange rates.

(2)

As adjusted to give effect to (i) the Contribution, and (ii) to the capital increase of US$450 thousand (R$2,425.3 thousand, using an exchange rate of R$5.389 to US$1.00, the commercial selling rate for U.S. dollars as of July 17, 2020 as reported by the Central Bank) carried out on July 17, 2020 by our parent company, Cogna.

 

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(3)

As further adjusted to give effect to (i) the Contribution, and (ii) the issuance and sale by Vasta of the Class A common shares in the offering, and the receipt of approximately US$328.8 million (R$1,704.3 million, using an exchange rate of R$5.183 to US$1.00, the commercial selling rate for U.S. dollars as of July 30, 2020 as reported by the Central Bank) in estimated net proceeds, considering an offering price of US$19.00 (R$98.48, using an exchange rate of R$5.183 to US$1.00, the commercial selling rate for U.S. dollars as of July 30, 2020 as reported by the Central Bank) per Class A common share, after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, and the use of proceeds therefrom (and assuming no exercise of the underwriters’ option to purchase additional shares and placement of all offered Class A common shares).

(4)

Comprised of Class B common shares. Includes 64,436,093 Class B common shares authorized and outstanding as of the date of this prospectus.

(5)

Total capitalization consists of non current bonds and financing plus non current lease liabilities plus parent’s net investment (which, following our initial public offering, will comprise the Class A common shares in addition to the Class B common shares).

Other than as set forth above, there have been no material changes to our capitalization since March 31, 2020.

 

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DILUTION

We have presented the dilution calculation below on the basis of the Successor’s net tangible book value as of March 31, 2020 as if the corporate reorganization had been completed as of March 31, 2020. We do not present the dilution calculation on the basis of Vasta’s actual net tangible book value because until the contribution of Somos shares to it, Vasta will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments.

As of March 31, 2020, the Successor had a net tangible book value of R$(1,907) million, corresponding to an as adjusted net tangible book value of R$(29.59) per share. As adjusted net tangible book value per share represents the amount of our total assets less our total liabilities, excluding goodwill and other intangible assets and deferred income tax and social contribution, divided by 64,436,093, the total number of the Successor’s shares adjusted to give effect to the effects of the Contribution using a one-to-58 exchange ratio.

The following table sets forth our calculation of net tangible book value and as adjusted net tangible book value per share.

 

     As of March 31, 2020  
     Successor (Vasta)  
    

R$millions

(except per share
amounts)

 

(+) Total assets

     6,326.9  

(-) Intangible assets and goodwill

     (4,991.5

(-) Deferred income tax and social contribution

     (38.6
  

 

 

 

Net tangible assets(1)

     1,296.9  
  

 

 

 

(-) Total liabilities

     (3,203.7
  

 

 

 

Net tangible book value(2)

     (1,906.8
  

 

 

 

As adjusted net tangible book value per share (R$)(3)

   R$ (29.59 ) 

As adjusted net tangible book value per share (US$)(4)

   US$ (5.69 ) 

 

(1)

We define net tangible assets as total assets minus (i) intangible assets and goodwill and (ii) deferred income tax and social contribution.

 

(2)

We define net tangible book value as net tangible assets minus total liabilities. Difference in amount due to rounding.

 

(3)

As adjusted net tangible book value per share is net tangible book value divided by 64,436,093, the total number of the Successor’s shares as adjusted to give effect to the Contribution using a one-to-58 exchange ratio.

 

(3)

As adjusted net tangible book value per share translated into U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank.

After giving effect to the sale of the Class A common shares offered by us in the offering, and estimating net proceeds of US$328.8 million considering an offering price of US$19.00 per Class A common share, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our pro forma as adjusted net tangible book value estimated as of March 31, 2020 would have been approximately US$(37.9) million, representing US$(0.46) per share. This represents an immediate increase in net tangible book value of US$5.23 per share to the existing shareholder and an immediate dilution in net tangible book value of US$19.46 per share to new investors purchasing Class A common shares in this offering. Dilution for this purpose represents the difference between the price per Class A common shares paid by these purchasers and net tangible book value per Class A common share immediately after the completion of the offering.

 

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

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

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

 

As adjusted net tangible book value per share as of March 31, 2020

     US$(5.69)  

Increase in net tangible book value per share attributable to the existing shareholder

     US$5.23  

Pro forma as adjusted net tangible book value per share after the offering

     US$(0.46)  

Dilution per Class A common share to new investors(1)

     US$19.46  

Percentage of dilution in net tangible book value per Class A common share for new investors

     102.4%  

 

(1)

Dilution represents the difference between the offering price per common share paid by new the shareholder and the pro forma as adjusted net tangible book value per common share immediately after giving effect to this offering.

 

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EXCHANGE RATES

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

The real depreciated against the U.S. dollar from mid-2011 to early 2016. In particular, during 2015, due to the poor economic conditions in Brazil, including as a result of political instability, the real depreciated at a rate that was much higher than in previous years. Overall in 2015, the real depreciated 47.0%, reaching R$3.905 per US$1.00 on December 31, 2015. In 2016, the real recovered significantly, appreciating 16.5% to R$3.259 per US$1.00 on December 31, 2016. In 2017, the real depreciated 1.5% against the U.S. dollar, ending the year at an exchange rate of R$3.308 per US$1.00. In 2018, due to the inherent political instability of the election period, the real/U.S. dollar exchange rate reported by the Central Bank was R$3.875 per US$1.00, which reflected a 17.1% depreciation in the real against the U.S. dollar. As of December 31, 2019, the real/U.S. dollar exchange rate reported by the Central Bank was R$4.031 per US$1.00. Recently, due to the COVID-19 and the economic and political instability, the real depreciated 47.2% against the U.S. dollar since December 31, 2019, and reached R$5.937 per US$1.00 as of May 14, 2020, its lowest level since the introduction of the currency in 1994. The exchange rate reported by the Central Bank was R$5.183 per US$1.00 on July 30, 2020. The Central Bank has intervened occasionally in the foreign exchange market to attempt to control instability in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian government will continue to allow the real to float freely or will intervene in the exchange rate market by re-implementing a currency band system or otherwise. The real may depreciate or appreciate substantially against the U.S. dollar in the future. Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are substantial reasons to foresee a significant imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. We cannot assure you that the Brazilian government will not place restrictions on remittances of foreign capital abroad in the future.

The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rates for the purchase of U.S. dollars expressed in Brazilian reais per U.S. dollar. The average rate is calculated by using the average of reported exchange rates by the Central Bank on each day during a monthly or yearly period.

 

Year

   Period-end      Average(1)      Low      High  

2014

     2.656        2.355        2.197        2.740  

2015

     3.905        3.339        2.575        4.195  

2016

     3.259        3.483        3.119        4.156  

2017

     3.308        3.193        3.051        3.381  

2018

     3.875        3.656        3.139        4.188  

2019

     4.031        3.946        3.652        4.260  

 

Month

   Period-End      Average(2)      Low      High  

February 2020

     4.499        4.341        4.238        4.499  

March 2020

     5.199        4.884        4.488        5.199  

April 2020

     5.427        5.326        5.078        5.651  

May 2020

     5.426        5.643        5.299        5.937  

June 2020

     5.476        5.197        4.889        5.476  

July 2020 (through July 30, 2020)

     5.183        5.283        5.111        5.429  

 

Source: Central Bank.

(1)

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

(2)

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

 

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MARKET INFORMATION

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

 

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SELECTED FINANCIAL AND OTHER INFORMATION

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

We have derived the summary statement of profit or loss data (1) for the three months ended March 31, 2020 and 2019 from the Sucessor’s unaudited interim condensed combined financial statements included elsewhere in this prospectus; (2) for the year ended December 31, 2019 and for the period from October 11 to December 31, 2018 from the Successor’s audited combined carve-out financial statements included elsewhere in this prospectus; and (3) for the period from January 1 to October 10, 2018 and for the year ended December 31, 2017 from the Predecessors’ audited carve-out financial statements included elsewhere in this prospectus. We have derived the statement of financial position data (1) as of March 31, 2020 from the Successor’s unaudited interim condensed combined financial statements included elsewhere in this prospectus; (2) as of December 31, 2019 and 2018 from the Successor’s audited combined carve-out financial statements included elsewhere in this prospectus; and (3) as of December 31, 2017 from the Predecessors’ audited carve-out financial statements included elsewhere in this prospectus. We prepare our financial statements in accordance with IFRS, as issued by the IASB, and our interim financial statements in accordance with IAS 34—Interim Financial Reporting. Our historical results are not necessarily indicative of the results that should be expected in the future.

 

     For Three Months Ended
March 31,
 
     2020      2020      2019  
     Successor (Vasta)  
     US$
millions(1)
     R$ millions  

Statement of Profit or Loss

        

Net revenue from sales and services

     75.5        392.4        353.1  

Net revenue from sales

     74.8        389.1        350.1  

Net revenue from services

     0.6        3.3        3.0  

Costs of goods sold and services

     (32.2      (167.3      (179.3
  

 

 

    

 

 

    

 

 

 

Gross profit

     43.3        225.1        173.8  
  

 

 

    

 

 

    

 

 

 

General and administrative expenses(2)

     (28.3      (147.1      (112.8

Other operating income, net

     0.2        0.8        2.0  
  

 

 

    

 

 

    

 

 

 

Profit before finance result and taxes

     15.1        78.8        63.0  
  

 

 

    

 

 

    

 

 

 

Finance income

     1.0        5.1        0.8  

Finance costs

     (8.6      (44.7      (41.0
  

 

 

    

 

 

    

 

 

 

Finance result

     (7.6      (39.6      (40.2
  

 

 

    

 

 

    

 

 

 

Profit before income tax and social contribution

     7.5        39.1        22.8  

Income tax and social contribution

     (2.2      (11.5      (7.9
  

 

 

    

 

 

    

 

 

 

Net profit for the period

     5.3        27.6        14.9  
  

 

 

    

 

 

    

 

 

 

 

(1)

For convenience purposes only, amounts in reais for the three months ended March 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

 

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(2)

Contains the sum of general and administrative expenses, commercial expenses and impairment losses on trade receivables.

 

    For Year Ended
December 31, 2019
    For Period
from
October 11 to
December 31,
2018
          For Period from January 1
to October 10, 2018
    For Year Ended
December 31, 2017
 
    Successor (Vasta)           Predecessor-
Somos-Anglo
    Predecessor-
Pitágoras
    Predecessor-
Somos-
Anglo
    Predecessor-
Pitágoras
 
    US$
millions(1)
    R$ millions           R$ millions  

Statement of Profit or Loss

                 

Net revenue from sales and services

    190.4       989.7       246.4           518.5       80.6       686.0       99.4  

Net revenue from sales

    186.8       971.3       241.2           500.4       80.6       663.4       99.4  

Net revenue from services

    3.6       18.4       5.2           18.2       —         22.6       —    

Costs of goods sold and services

    (86.0     (447.0     (69.9         (221.0     (28.2     (255.2     (35.2
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

    104.4       542.6       176.5           297.6       52.4       430.7       64.2  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

General and administrative expenses(2)

    (89.5     (465.3     (138.3         (453.6     (13.4     (332.5     (12.4

Other operating income (expenses), net

    1.0       5.1       2.9           4.3       —         (1.9     —    
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Profit (loss) before finance result and taxes

    15.9       82.5       41.0           (151.8     39.0       96.3       51.8  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Finance income

    1.0       5.4       3.9           26.8       1.2       21.8       0.8  

Finance costs

    (34.3     (178.2     (41.2         (221.4     —         (128.7     —    
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Finance result

    (33.2     (172.8     (37.3         (194.6     1.1       (106.9     0.8  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

(Loss) Profit before income tax and social contribution

    (17.4     (90.3     3.7           (346.3     40.2       (10.6     52.7  

Income tax and social contribution

    5.7       29.6       (4.7         (267.0     (13.7     2.1       (17.9
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Net profit (loss) for the period / year

    (11.7     (60.7     (1.0         (613.3     26.5       (8.5     34.8  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts in reais for the year ended December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

 

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(2)

Contains the sum of general and administrative expenses, commercial expenses and impairment losses on trade receivables.

 

    As of March 31,
2020
    As of December 31,
2019
    As of
December 31,
2018
          As of December 31, 2017  
    Successor           Predecessor-
Somos-Anglo
    Predecessor-
Pitágoras
 
    US$
millions(1)
    R$
millions
    US$
millions(1)
    R$ millions           R$ millions  

Statement of Financial Position:

                 

Assets

                 

Current assets

                 

Cash and cash equivalents

    18.1       93.9       8.3       43.3       102.2           165.7       63.0  

Trade receivables

    98.7       513.1       74.8       388.8       319.8           238.5       —    

Inventories

    42.1       218.7       42.7       222.2       262.2           183.5       24.0  

Taxes Recoverable and Income tax and social contribution recoverable

    9.6       49.9       9.7       50.3       35.8           17.5       —    

Prepayments

    7.3       38.0       4.4       22.6       8.8           3.3       —    

Other Receivables

    1.1       5.8       0.3       1.7       9.3           6.3       0.3  

Related Parties—other receivables

    3.1       16.2       7.3       38.1       —             —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total current assets

    180.0       935.6       147.5       767.2       738.0           614.8       87.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Non-current assets

                 

Judicial deposits and Escrow Accounts

    33.4       173.4       33.3       172.9       168.5           6.0       —    

Deferred income tax and social contribution

    7.4       38.6       11.0       57.3       88.0           27.6       5.3  

Property, plant and equipment

    36.1       187.9       35.6       185       58.3           57.3       0.0  

Intangible assets and goodwill

    960.1       4991.5       958.9       4985.4       5,086.9           657.7       0.3  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total non-current assets

    1,037.0       5,391.3       1,038.8       5,400.6       5,401.7           748.5       5.7  

Total assets

    1,217.0       6,326.9       1,186.3       6,167.8       6,139.7           1,363.3       93.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Liabilities and parent’s net investment

                 

Current liabilities

                 

Bonds and financing

    82.7       429.8       84.8       440.9       339.9           217.6       —    

Lease liabilities

    2.4       12.6       1.4       7.1       —             —         —    

Suppliers

    44.6       231.8       43.0       223.7       229.5           228.5       13.8  

Suppliers related parties

    32.6       169.3       39.8       207.2       230.8           231.2       —    

Taxes payable

    0.2       1.1       0.2       0.9       1.1           0.9       —    

Income tax and social contribution payable

    3.0       15.7       3.6       18.8       7.8           3.2       —    

Salaries and social contributions

    12.2       63.4       11.9       61.7       85.6           62.8       1.6  

Contract liabilities and deferred income

    10.1       52.7       9.5       49.3       76.0           72.9       11.5  

Accounts payable for business combination

    1.2       6.0       0.3       1.8       0.6           —         —    

Other liabilities—related parties

    2.5       12.8       0.8       3.9       —             —         —    

Other liabilities

    22.3       115.8       9.5       49.2       3.4           11.1       —    

Loans from related parties

    14.6       75.8       5.6       29.2       —             —         —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total current liabilities

    228.3       1,187.0       210.4       1,093.7       974.7           828.1       26.8  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Non-current liabilities

                 

Bonds and financing

    234.1       1.217.2       230.8       1200       1,318.6           989.6       —    

Lease liabilities

    28.3       146.9       28.2       146.6       —             —         —    

Accounts payable for business combination

    6.9       35.9       1.8       9.2       10.1           10.2       —    

Provision for risks of tax, civil and labor losses

    117.0       608.3       117.1       609.0       554.6           9.3       —    

Contract liabilities and deferred revenues

    1.6       8.5       1.8       9.2       13.3           5.2       —    

Total non-current liabilities

    388.1       2,016.7       379.7       1,974.0       1,896.5           1,014.3       —    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total liabilities

    616.2       3,203.7       590.1       3,067.7       2,871.2           1,842.4       26.8  

Total parent’s net investment

    600.7       3,123.2       596.3       3,100.1       3,268.5           (479.1     66.1  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

Total liabilities and parent’s net investment

    1,217.0       6,326.9       1,186.3       6,167.8       6,139.7           1,363.3       93.0  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

 

 

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(1)

For convenience purposes only, amounts in reais as of March 31, 2020 and December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020, as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

Operating Data

ACV Bookings

The tables below show ACV Bookings for the periods indicated. On January 23, 2020, we announced the result of ACV Bookings for the 2020 sales cycle (from October 2019 to September 2020), which reached R$716.0 million based on contracted amounts as of such date. This volume represents growth of 25% over the amount registered in the 2019 sales cycle. The number of enrolled students and average ticket per student per year for deriving results of ACV Bookings for the 2020 sales cycle were 1,311 thousand and R$546.07, respectively. Both the ACV Bookings and the average ticket are calculated based on the sum of actual contracts signed during the sales period and assumes the historical rates of returned goods from customers for the preceding 24-month period. Since the actual rates of returned goods from sales during the period may be different from the historical average rates and the actual volume of merchandise ordered by our customers may be different from the contracted amount, the actual revenue recognized during the period between October 2019 and September 2020 may be different from the ACV Bookings for the 2020 sales cycle. The COVID-19 pandemic could have an adverse effect on our ACV Bookings for the 2021 sales cycle (from October 2020 to September 2021), and while we have implemented certain measures to address the potential impact of COVID-19 on our ACV Bookings and business in general, we believe that our actual revenue recognized in the year 2020 to be derived from solutions we characterize as subscription arrangements will be adversely affected by effects of declining enrollment at our partner schools during the first half of 2020, particularly in respect of childhood education. See “Risk Factors—Risks Relating to Our Business and Industry—Our operations and results may be negatively impacted by the COVID-19 pandemic,” “Summary—Recent Developments—COVID-19” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Trend Information.”

 

     As of and For Three Months
Ended March 31, 2020(1)
 
     Successor (Vasta)  

Number of partner schools

     4,167  

Number of enrolled students (in thousands)

     1,311.0  

Core content

     1,311.0  

Complementary education solutions(2)

     179  

Average ticket per student per year (R$)

   R$ 546.1  

Average ticket per student per year (US$)(3)

   US$ 105.0  

ACV Bookings (R$ in millions)(4)

   R$ 716.0  

ACV Bookings (US$ in millions)(1)(3)

   US$ 137.7  

 

(1)

For the 2020 school year (which we define for purposes of ACV Bookings as the period starting in October 1, 2019 and ending in September 30, 2020). It does not take into account increases in schools, students and ACV Bookings as a result of acquisitions, such as MindMakers, which was acquired at the beginning of 2020.

(2)

Includes LEM (Líder em Mim), English Stars and Bilingual Experience. Does not include MindMakers, which was acquired at the beginning of 2020.

(3)

For convenience purposes only, amounts in reais as of March 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

 

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(4)

We define ACV Bookings as the revenue we would expect to recognize from a partner school in each school year, based on the number of students who have contracted our services, or “enrolled students,” that will access our content at such partner school in such school year. ACV Bookings is a non-accounting managerial operating metric and is not prepared in accordance with IFRS. For more information about ACV Bookings, see “Presentation of Financial and Other Information—Special Note Regarding ACV Bookings.”

 

    As of and For Year Ended December 31,           As of and For Year Ended December 31,  
    2019(1)     2019(2)           2018(3)     2018(3)     2017(4)     2017(4)  
    Successor (Vasta)           Predecessor-
Somos-Anglo
    Predecessor-
Pitágoras
    Predecessor-
Somos-Anglo
    Predecessor-
Pitágoras
 
    US$(1)     R$ (except number of
partner schools and
enrolled students)
          R$ (except number of partner schools and enrolled
students)
 

Number of partner schools

    n/a       3,400           2,323       622       1,965       616  

Number of enrolled students (in thousands)

    n/a       1,186           812.7       198.6       695.3       196.1  

Core content

    n/a       1,186           812.7       198.6       695.3       196.1  

Complementary education solutions

    n/a       133.6           120.2       —         115.2       —    

Average ticket per student per year

  US$ 92.9     R$ 483.0         R$ 486.3     R$ 516.5     R$ 491.0     R$ 496.0  

ACV Bookings (in millions)(5)

  US$ 110.2     R$ 572.8         R$ 395.2     R$ 102.6     R$ 341.4     R$ 97.2  

 

(1)

For convenience purposes only, amounts in reais as of December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

(2)

For the 2019 school year (which we define for purposes of ACV Bookings as the period starting in October 1, 2018 and ending in September 30, 2019).

(3)

For the 2018 school year (which we define for purposes of ACV Bookings as the period starting in October 1, 2017 and ending in September 30, 2018).

(4)

For the 2017 school year (which we define for purposes of ACV Bookings as the period starting in October 1, 2016 and ending in September 30, 2017).

(5)

We define ACV Bookings as the revenue we would expect to recognize from a partner school in each school year, based on the number of students who have contracted our services, or “enrolled students,” that will access our content at such partner school in such school year. ACV Bookings is a non-accounting managerial operating metric and is not prepared in accordance with IFRS. For more information about ACV Bookings, see “Presentation of Financial and Other Information—Special Note Regarding ACV Bookings.”

Reconciliations for Non-GAAP Financial Measures

The following tables set forth reconciliations of Adjusted EBITDA to net profit (loss) for the three months period ended March 31, 2020 and 2019, for the year ended December 31, 2019, for the period from October 11 to December 31, 2018, for the period from January 1, to October 10, 2018 and for the year ended December 31, 2017, our most recent directly comparable financial measures calculated and presented in accordance with IFRS, reconciliations of our free cash flow to net cash flows (used in) from operating activities for the three months period ended March 31, 2020 and 2019, for the year ended December 31, 2019, for the period from October 11 to December 31, 2018, for the period from January 1, to October 10, 2018 and for the year ended December 31, 2017, our most recent directly comparable financial measures calculated and presented in accordance with IFRS and reconciliations of our adjusted cash conversion ratio for the three months period ended March 31, 2020 and 2019, for the year ended December 31, 2019, for the period from October 11 to December 31, 2018, for the period from January 1, to October 10, 2018 and for the year ended December 31, 2017, our most recent directly

 

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comparable financial measures calculated and presented in accordance with IFRS. For further information on why our management chooses to use these non-GAAP financial measures, and on the limits of using these non-GAAP financial measures, please see “Presentation of Financial and Other Information—Special Note Regarding Non-GAAP Financial Measures—Adjusted EBITDA and Free Cash Flow.”

Reconciliation of our Adjusted EBITDA to Net Profit (Loss) for the Period / Year

 

     For Three Months Ended March 31,  
     2020      2020      2019  
     Successor (Vasta)  
     US$ millions(1)      R$ millions  

Net profit (loss) for the period

     5.3        27.6        14.9  

(+) Income tax and social contribution

     2.2        11.5        7.9  

(+/-) Finance result

     7.6        39.6        40.2  

(+) Depreciation and amortization

     8.1        42.1        41.3  

EBITDA

     23.2        120.8        104.2  

(+) Share-based compensation plan(2)

     0.1        0.7        0.3  

(+) Provision for risks of tax, civil and labor losses(3)

     —          —          1.1  

Adjusted EBITDA

     23.4        121.5        105.7  

 

(1)

For convenience purposes only, amounts in reais for the three months ended March 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

(2)

Share-based compensation expenses incurred in the periods.

(3)

Provision for risks of tax, civil and labor losses regarding penalties, due to income tax positions taken by the Predecessor Somos—Anglo and the Successor in connection with a corporate reorganization carried out by the Predecessor Somos—Anglo.

 

    For Year Ended
December 31,
    For Period
from
October 11
to
December 31
          For Period from
January 1 to October 10
    For Year Ended
December 31,
 
    2019     2018           2018     2017  
    Successor           Predecessor-
Somos-
Anglo
    Predecessor-
Pitágoras
    Predecessor-
Somos-
Anglo
    Predecessor-
Pitágoras
 
    US$
millions(1)
    R$ millions           R$ millions  

Net profit (loss) for the period / year

    (11.7     (60.7     (1.0         (613.3     26.5       (8.5     34.8  

(+) Income tax and social contribution

    (5.7     (29.6     4.7           267.0       13.7       (2.1     17.9  

(+/-) Finance result

    33.2       172.8       37.3           194.6       (1.1     106.9       (0.8

(+) Depreciation and amortization

    31.7       164.9       21.8           37.7       0.3       43.2       0.1  

EBITDA

    47.6       247.4       62.8           (114.1     39.4       139.5       51.9  

(+) Share-based compensation plan(2)

    0.3       1.4       0.5           69.1       —         5.6       —    

(+) Provision for risks of tax, civil and labor losses(3)

    1.0       5.2       —             150.6       —         —         —    

Adjusted EBITDA

    48.9       254.0       63.2           105.6       39.4       145.1       51.9  

 

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(1)

For convenience purposes only, amounts in reais for the year ended December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

(2)

Share-based compensation expenses incurred in the periods.

(3)

Provision for risks of tax, civil and labor losses regarding penalties, due to income tax positions taken by the Predecessor Somos – Anglo and the Successor in connection with a corporate reorganization carried out by the Predecessor Somos – Anglo.

Reconciliation of Free Cash Flow to Net Cash Flows from Operating Activities for the Period / Year

 

     For Three Months Ended March 31,  
     2020      2020      2019  
     Successor (Vasta)  
     US$ millions(1)      R$ millions  

Net cash flows from (used in) operating activities

     16.3        84.7        (176.3

(-) Acquisition of property, plant and equipment

     (0.1      (0.7      (3.1

(-) Acquisition of subsidiaries, net of cash acquired

     (4.5      (23.5      —    

(-) Addition to intangible assets

     (1.3      (6.6      (3.9

Free Cash Flow

     10.4        53.8        (183.3

 

(1)

For convenience purposes only, amounts in reais for the three months ended March 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

 

    For Year Ended
December 31,
    For Period
from
October 11
to
December 31
          For Period
from January 1 to

October 10
    For Year Ended
December 31,
 
    2019     2019     2018           2018     2018     2017     2017  
    Successor (Vasta)           Predecessor-
Somos-
Anglo
    Predecessor-
Pitágoras
    Predecessor-
Somos-
Anglo
    Predecessor-
Pitágoras
 
    US$
millions(1)
    R$ millions           R$ millions  

Net cash flows from (used in) operating activities

    1.4       7.2       3.1           (93.3     84.6       103.6       28.4  

(-) Acquisition of property, plant and equipment

    (2.5     (12.8     (6.1         (8.2     (0.2     (8.5     —    

(-) Acquisition of subsidiaries

    —         —         —             —         —         1.0       —    

(-) Addition to intangible assets

    (7.2     (37.5     (10.7         (27.6     (0.8     (21.6     —    
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Free Cash Flow

    (8.3     (43.0     (13.7         (128.9     83.6       74.5       28.4  
 

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)

For convenience purposes only, amounts in reais for the year ended December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$5.199 to US$1.00, the commercial selling rate for

 

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  U.S. dollars as of March 31, 2020 as reported by the Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.

Calculation of Adjusted Cash Conversion Ratio for the Period / Year

 

    For the
Three
Months
Ended
March 31,
    For the
Three
Months
Ended
March 31,
    For Year
Ended
December 31,
    For Period
from
October 11 to
December 31,
          For Period
from
January 1 to
October 10
    For Period
from
January 1 to
October 10
    For Year Ended
December 31,
 
    2020     2019     2019     2018           2018     2018     2017     2017  
    Successor           Predecessor-
Somos-
Anglo
    Predecessor-
Pitágoras
    Predecessor-
Somos-
Anglo
    Predecessor-
Pitágoras
 
    R$ millions  

Net cash flows from (used in) operating activities

    84.7       (176.3     7.2       3.1           (93.3     84.6       103.6       28.4  

( / ) Adjusted EBITDA

    121.5       105.7       254.0       63.2           105.6       39.4       145.1       51.9  
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted Cash Conversion Ratio

    69.7     (166.8 %)      2.8     4.9         (88.2 %)      214.9     71.4     54.6
 

 

 

   

 

 

   

 

 

   

 

 

       

 

 

   

 

 

   

 

 

   

 

 

 

 

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MANAGEMENT’S DISCUSSION AND ANALYSIS

OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

The following discussion of our financial condition and results of operations should be read in conjunction with:

 

   

the unaudited interim condensed combined financial statements of the Successor as of March 31, 2020 and for the three months ended March 31, 2020 and unaudited interim condensed combined carve-out financial statements for the three months ended March 31, 2019, included elsewhere in this prospectus;

 

   

the audited combined carve-out financial statements of the Successor as of December 31, 2019 and 2018 and for the year ended December 31, 2019 and for the period from October 11 to December 31, 2018 included elsewhere in this prospectus;

 

   

the audited combined carve-out financial statements of the Predecessors as of December 31, 2017 and January 1, 2017, and for the period from January 1 to October 10, 2018 and for the year ended December 31, 2017 included elsewhere in this prospectus; and

 

   

information presented under “Presentation of Financial and Other Information,” “Summary Financial and Other Information” and “Selected Financial and Other Information.”

Overview

We are a leading, high-growth education company in Brazil powered by technology, providing end-to-end educational and digital solutions that cater to all needs of private schools operating in the K-12 educational segment, ultimately benefiting all of our stakehold