Arco(ARCE) - 2022 Q2 - Quarterly Report

Unaudited Interim Condensed Consolidated Financial Statements Interim Condensed Consolidated Statements of Financial Position Total assets decreased to R$5,588.1 million by June 30, 2022, from R$5,990.1 million, while total equity slightly increased to R$1,922.3 million Consolidated Statement of Financial Position (in thousands of BRL) | Account | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Total Current Assets | 1,670,167 | 2,046,927 | | Total Non-current Assets | 3,917,901 | 3,943,192 | | Total Assets | 5,588,068 | 5,990,119 | | Total Current Liabilities | 1,259,964 | 1,393,211 | | Total Non-current Liabilities | 2,405,849 | 2,721,674 | | Total Liabilities | 3,665,813 | 4,114,885 | | Total Equity | 1,922,255 | 1,875,234 | | Total Liabilities and Equity | 5,588,068 | 5,990,119 | Interim Condensed Consolidated Statements of Income and Comprehensive Income Revenue grew 43.2% to R$842.2 million for H1 2022, resulting in a net profit of R$89.3 million, a turnaround from a prior-year loss Key Income Statement Data (in thousands of BRL) | Metric | Six-months ended June 30, 2022 | Six-months ended June 30, 2021 | | :--- | :--- | :--- | | Revenue | 842,174 | 587,973 | | Gross Profit | 592,542 | 432,745 | | Operating Profit | 106,683 | 60,566 | | Net Profit (Loss) | 89,318 | (8,208) | | Basic EPS (Class A/B) | 1.59 | (0.14) | Q2 Key Income Statement Data (in thousands of BRL) | Metric | Three-months ended June 30, 2022 | Three-months ended June 30, 2021 | | :--- | :--- | :--- | | Revenue | 412,137 | 256,301 | | Operating Profit | 26,283 | 8,458 | | Net Loss | (13,341) | (20,019) | | Basic Loss per Share (Class A/B) | (0.24) | (0.35) | Interim Condensed Consolidated Statements of Changes in Equity Total equity increased to R$1,922.3 million by June 30, 2022, driven by R$89.3 million net profit, partially offset by treasury share purchases Changes in Equity for the Six-Months Ended June 30, 2022 (in thousands of BRL) | Description | Amount | | :--- | :--- | | Balance at December 31, 2021 | 1,875,234 | | Profit for the period | 89,318 | | Share based compensation plan | 9,319 | | Purchase of treasury shares | (51,616) | | Restricted stock transferred | - | | Balance at June 30, 2022 | 1,922,255 | Interim Condensed Consolidated Statements of Cash Flows Operating cash flow decreased to R$29.5 million, while investing activities generated R$531.6 million, leading to a R$164.6 million increase in cash and cash equivalents Cash Flow Summary (in thousands of BRL) | Activity | Six-months ended June 30, 2022 | Six-months ended June 30, 2021 | | :--- | :--- | :--- | | Net cash flows from operating activities | 29,503 | 136,765 | | Net cash flows from (used in) investing activities | 531,612 | (103,415) | | Net cash flows used in financing activities | (396,220) | (138,976) | | Increase (decrease) in cash and cash equivalents | 164,610 | (109,718) | | Cash and cash equivalents at end of period | 375,753 | 314,692 | Notes to the Financial Statements Note 1: Corporate Information Arco, a Cayman Islands holding company traded on NASDAQ, details its corporate structure and significant H1 2022 events including acquisitions and share repurchases - Arco is a holding company incorporated in the Cayman Islands, traded on NASDAQ under "ARCE", with its principal operations in Brazil providing K-12 curriculum content[17] - Significant corporate activities in H1 2022 included: - Loan Liquidation: Paid off a R$201.9 million loan in January 2022[19] - Acquisitions: Acquired PGS and Mentes do Amanhã from Pearson, and the remaining 42.58% of Geekie for R$223.9 million[22] - Share Repurchase: Purchased 531,125 Class A common shares for approximately US$9.9 million[23] Note 2: Significant Accounting Policies Interim financial statements adhere to IAS 34, maintaining consistency with 2021 annual policies, with the Brazilian real as the functional currency - The unaudited interim condensed consolidated financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting[24] - Accounting policies applied are consistent with those from the annual consolidated financial statements for the year ended December 31, 2021[25] Note 3: Cash and Cash Equivalents Cash and cash equivalents increased to R$375.8 million by June 30, 2022, primarily comprising highly liquid Bank Certificates of Deposit Cash and Cash Equivalents Breakdown (in thousands of BRL) | Component | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Cash and bank deposits | 17,586 | 20,085 | | Bank deposits in foreign currency | 26,954 | 154 | | Cash equivalents (CDBs) | 331,213 | 190,904 | | Total | 375,753 | 211,143 | Note 4: Financial Investments Financial investments significantly decreased to R$411.5 million, primarily due to a loan payment and the acquisition of Geekie shares Financial Investments (in thousands of BRL) | Classification | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Current | 378,134 | 973,294 | | Non-current | 33,382 | 40,762 | | Total | 411,516 | 1,014,056 | - The decrease in financial investments is primarily due to the payment of a loan in January and the acquisition of Geekie shares[34] Note 5: Trade Receivables and Advances from Customers Net trade receivables slightly increased to R$607.8 million, while advances from customers grew to R$60.9 million, driven by increased B2C sales Trade Receivables (in thousands of BRL) | Account | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Gross Trade Receivables | 687,573 | 680,395 | | Allowance for doubtful accounts | (79,747) | (87,132) | | Net Trade Receivables | 607,826 | 593,263 | - Advances from customers increased to R$60,932 from R$35,291, driven by the growth of the business-to-consumer (B2C) sales model, which grew to 31.9% of revenue from 25.2% in the prior year period[39] Note 6: Inventories Inventories increased to R$174.0 million, primarily in educational content and content in progress, with the inventory reserve also rising to R$41.1 million Inventory Breakdown (in thousands of BRL) | Category | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Educational content | 81,613 | 75,778 | | Educational content in progress | 76,579 | 71,314 | | Other | 15,829 | 11,490 | | Total | 174,021 | 158,582 | Note 7: Related Parties The company details related party transactions and discloses key management personnel compensation, which totaled R$60.0 million for H1 2022 - The company engages in transactions with related parties, including sales of educational content to entities under common control and loans to minority and former shareholders of acquired entities[45][46] Key Management Personnel Compensation (in thousands of BRL) | Category | Six-months ended June 30, 2022 | Six-months ended June 30, 2021 | | :--- | :--- | :--- | | Short-term employee benefits | 40,580 | 31,653 | | Share-based compensation plan | 19,422 | 18,140 | | Total | 60,002 | 49,793 | Note 8: Intangible Assets Intangible asset acquisitions totaled R$96.1 million in H1 2022, primarily for educational content and technology platforms, with amortization expense at R$116.4 million - Intangible asset additions in H1 2022 totaled R$96,053, mainly for: - Development of educational content: R$43,406 - Development of technology platforms: R$26,074 - Trademarks: R$14,505[52] Note 9: Loans and Financing Total loans and financing decreased to R$1,650.4 million due to a R$202.0 million loan repayment, with debentures and convertible notes as major outstanding debts Loans and Financing Breakdown (in thousands of BRL) | Instrument | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Debentures (due 2023) | 980,022 | 919,703 | | Convertible notes (due 2028) | 622,081 | 647,474 | | Bank loan (paid Jan 2022) | - | 201,990 | | Other bank loans | 48,321 | 62,150 | | Total | 1,650,423 | 1,831,327 | Note 10: Derivative Financial Assets and Liabilities Total derivative liabilities decreased to R$125.9 million by June 30, 2022, primarily due to a fair value adjustment on a put option related to senior notes Derivative Financial Liabilities (in thousands of BRL) | Instrument | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Swap Geekie | 7,096 | - | | Put option | 118,811 | 223,561 | | Total | 125,907 | 223,561 | - The put option allows Dragoneer and General Atlantic to convert their investment in senior notes into Class A shares. The company recognized a net fair value adjustment of R$104.8 million as finance income related to this option in H1 2022[58] Note 11: Accounts Payable to Selling Shareholders Accounts payable to selling shareholders decreased to R$1,500.1 million, with major balances for Positivo and International School acquisitions, partly due to Geekie payments Accounts Payable to Selling Shareholders by Acquisition (in thousands of BRL) | Acquisition | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Acquisition of Positivo | 795,202 | 754,451 | | Acquisition of International School | 399,118 | 379,501 | | Acquisition of EI | 226,256 | 234,493 | | Acquisition of Geekie | 15,291 | 224,759 | | Other Acquisitions | 64,198 | 75,582 | | Total | 1,500,065 | 1,668,786 | Note 12: Labor and Social Obligations Labor and social obligations include details on share-based compensation, with the Geekie stock option plan settled for R$75.6 million and 500,016 RSUs outstanding - On June 1, 2022, the company settled the Geekie stock options plan in cash for R$75,578[72] Restricted Stock Units (RSU) Movement | Description | Number of RSUs | | :--- | :--- | | Outstanding at December 31, 2021 | 142,184 | | Granted | 462,715 | | Transferred | (48,353) | | Forfeited (Effectively & Estimated) | (56,530) | | Outstanding at June 30, 2022 | 500,016 | - Total compensation expense for share-based plans in H1 2022 was R$19,422 (R$9,319 principal and R$10,103 taxes)[75] Note 13: Equity The company repurchased 531,125 shares in H1 2022, holding a total of 1,027,142 treasury Class A common shares by June 30, 2022 Treasury Share Movement | Description | Number of Shares | | :--- | :--- | | As of December 31, 2021 | 605,316 | | Repurchase | 531,125 | | Transferred – RSU's program | (109,299) | | As of June 30, 2022 | 1,027,142 | Note 14: Earnings (Loss) Per Share (EPS) Basic EPS for H1 2022 was R$1.59, a significant improvement from a prior-year loss, with diluted EPS for Class A shares at R$(1.45) due to anti-dilutive effects EPS for Six-Months Ended June 30 | EPS Type | 2022 (in BRL) | 2021 (in BRL) | | :--- | :--- | :--- | | Basic EPS (Class A & B) | 1.59 | (0.14) | | Diluted EPS (Class A) | (1.45) | (0.14) | | Diluted EPS (Class B) | 1.59 | (0.14) | Note 15: Revenue Net revenue for H1 2022 increased 43.2% to R$842.2 million, primarily driven by R$834.6 million from educational content sales Net Revenue Breakdown (in thousands of BRL) | Category | Six-months ended June 30, 2022 | Six-months ended June 30, 2021 | | :--- | :--- | :--- | | Educational content | 834,607 | 584,471 | | Other | 9,554 | 5,086 | | Taxes | (1,987) | (1,584) | | Total Revenue | 842,174 | 587,973 | Note 16: Expenses by Nature Operating expenses increased in H1 2022, with cost of sales at R$249.6 million, selling expenses at R$338.8 million, and G&A at R$166.1 million, reflecting expansion Operating Expenses for Six-Months Ended June 30 (in thousands of BRL) | Expense Category | 2022 | 2021 | | :--- | :--- | :--- | | Cost of sales | (249,632) | (155,228) | | Selling expenses | (338,792) | (238,385) | | General and administrative expenses | (166,137) | (136,294) | | Total | (754,561) | (529,907) | Note 17: Finance Result The company achieved a net finance income of R$10.0 million in H1 2022, a significant improvement, driven by foreign exchange gains and fair value changes in derivatives Finance Result for Six-Months Ended June 30 (in thousands of BRL) | Category | 2022 | 2021 | | :--- | :--- | :--- | | Finance income | 373,615 | 22,054 | | Foreign exchange gains | 139,058 | 2,047 | | Changes in fair value of derivatives | 107,402 | - | | Finance costs | (363,586) | (84,292) | | Interest on loans and financing | (105,544) | (8,905) | | Foreign exchange loss | (95,396) | (6,139) | | Interest on acquisition of investments | (89,674) | (54,024) | | Finance result | 10,029 | (62,238) | Note 18: Income Taxes Income tax expense was R$7.5 million in H1 2022, with an effective tax rate of 7.7%, significantly lower than the statutory rate due to non-taxable financial results - The effective tax rate for H1 2022 was 7.7%, compared to the statutory rate of 34%. The main reconciling item was the non-taxable financial result on loans and financing (convertible senior notes)[94][95] Net Deferred Tax Assets (in thousands of BRL) | Description | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Total deferred tax assets | 414,973 | 384,359 | | Total deferred tax liabilities | (87,399) | (63,136) | | Deferred tax assets, net | 327,574 | 321,223 | Note 19: Segment Information Arco operates in Core Curriculum and Supplemental Solutions segments, with Core generating R$713.5 million revenue and Supplemental R$143.9 million in H1 2022, both showing strong growth - The company operates and makes strategic decisions based on two segments: - Core: Provides solutions addressing the Brazilian K-12 curriculum - Supplemental: Provides additional content such as ESL programs, LMS platforms, and socio-emotional skills content[101][102] Segment Performance for Six-Months Ended June 30, 2022 (in thousands of BRL) | Segment | Net Revenue | Segment Profit | | :--- | :--- | :--- | | Core | 713,495 | 230,546 | | Supplemental | 143,850 | 27,306 | Segment Performance for Six-Months Ended June 30, 2021 (in thousands of BRL) | Segment | Net Revenue | Segment Profit | | :--- | :--- | :--- | | Core | 464,779 | 138,029 | | Supplemental | 123,194 | 56,331 | Note 20: Financial Instruments The company categorizes financial instruments by measurement basis and fair value hierarchy, with derivative liabilities and accounts payable to selling shareholders as key Level 3 FVPL instruments - The company classifies its financial instruments by fair value hierarchy. Derivative financial liabilities and accounts payable to selling shareholders are the primary Level 3 instruments, valued using techniques like discounted cash flow analysis with unobservable inputs[117][119] Level 3 Fair Value Measurements (Liabilities, in thousands of BRL) | Instrument | June 30, 2022 (unaudited) | December 31, 2021 | | :--- | :--- | :--- | | Derivative financial liabilities | 118,811 | 223,561 | | Accounts payable to selling shareholders | 640,250 | 867,264 | Note 21: Commitments and Contingencies An ongoing arbitration with International School's non-controlling shareholder regarding purchase price calculation is the primary contingency, with a provision based on 2019 and 2020 EBITDA - An arbitration proceeding with the non-controlling shareholder of International School regarding the purchase price calculation is ongoing[124] - A partial award determined the calculation methodology should be based on 10 times realized EBITDA for 2019 and 2020. The company has provisioned for this liability, which is included in 'Accounts payable to selling shareholders'[125][128] Note 22: Subsequent Events Significant subsequent events include further share repurchases, the issuance of R$1.2 billion in new debentures for debt refinancing, and a corporate reorganization - Events after the reporting period include: - Share Repurchase: Purchased an additional 20,000 Class A shares for US$282 thousand between July 1 and August 15, 2022[129] - Debenture Issuance: Issued R$1.2 billion in new debentures in August 2022 to prepay existing debt and extend maturity[130] - Corporate Restructuring: Completed a reorganization on August 1, 2022, incorporating Eduqo and Studos into another subsidiary[131]