Arco Reports Fourth Quarter and Full Year 2021 Results

Arco Platform Limited, or Arco or Company (Nasdaq: ARCE), today reported financial and operating results for the fourth quarter and full year ended December 31, 2021.

“We are excited with the conclusion of our 2022 commercial cycle and the outlook for the school year. As schools returned to in person classes and restrictions related to the COVID-19 pandemic were, and continue to be, gradually lifted, Arco resumed its growth trajectory, outpacing industry peers, as a result of our relentless pursuit of quality, superior value proposition and assertive go-to-market strategy. Our 2022 ACV bookings increased 46% year-over-year to R$1,560 million, above the guidance range provided in our 3Q21 earnings release, mainly driven by the healthy retention rate of our partner schools and price increase for our solutions, combined with robust organic growth for both our Core and Supplemental solutions, powered by our successful cross-selling initiatives. We are very confident we will be able to recognize revenues in line with ACV bookings as partner schools see their operations return to full capacity, and we expect another strong commercial cycle for 2023 as we now have the portfolio of Core solutions to cover all geographies, price points and methodologies across Brazil, together with our ability to service our partner schools with other relevant competencies covered in our Supplemental portfolio. On our integration agenda, we have the conviction that we are in the right path to become a more agile Company and deliver an even better user experience to our partner schools, students, and parents. Our commitment to efficiency led us to deliver the adjusted EBITDA margin for 2021 within the guidance, despite numerous challenges, and we believe this will allow us to improve profitability and cash generation this year and in the years to come. I would like to thank Arco’s team for their resilience and exceptional deliveries in such a difficult year”, said Ari de Sá Neto, CEO and founder of Arco.

Fourth Quarter 2021 Results

• Net revenue of R$460.8 million
• Gross profit of R$366.4 million
• Adjusted EBITDA of R$224.4 million
• Adjusted net income of R$88.7 million

Full Year Ended December 31, 2021 Results

• Net Revenue of R$1,232.1 million
• Gross Profit of R$937.7 million
• Adjusted EBITDA of R$430.9 million
• Adjusted Net Income of R$132.9 million

¹ Businesses acquired in 2021 were not considered in the 2021 adjusted EBITDA margin guidance (MeSalva!, Eduqo, Edupass, COC and Dom Bosco).

Key Messages

• Net revenues for the quarter were R$460.8 million, a 55% year-over-year increase, representing a 29.5% revenue recognition of 2022 ACV bookings. Core solutions totaled R$321.2 million (+42% YoY), while Supplemental solutions were R$139.6 million (+100% YoY). For the full year 2021, net revenues were 23% higher year-over-year, at R$1,232.1 million, with Core solutions totaling R$936.0 million (+11% YoY) and Supplemental solutions increasing 84% to R$296.1 million. Excluding the acquisitions concluded in 2021 (MeSalva!, Eduqo, Edupass and COC and Dom Bosco), net revenues increased 18% YoY in 2021.

• Gross margin for 4Q21 improved 1.9 percentage points YoY to 79.5% as our initial integration initiatives relating to the integration and improvement of our supply chain processes started to produce positive results. Gross margin for 2021 was 76.1%, versus 77.9% in 2020, as the impacts of integration initiatives in 4Q21 were offset by the 259% increase in disposal of books related to student dropouts in partner schools that impacted 9M21 results. Excluding the effect of the increased level of disposals, 2021 gross margin was 77.5%.

• Higher selling expenses excluding depreciation and amortization for 4Q21 (+53% YoY) and FY2021 (+35% YoY) reflect (i) expenses related to businesses acquired in 2021, and (ii) travel and marketing expenses, due to the resumption of traveling and marketing events, which are key to our commercial strategy. Excluding the effect of businesses acquired in 2021, selling expenses increased 40% in 4Q21 and 30% in 2021. Allowance for doubtful accounts increased 57% YoY in 4Q21 but decreased 23% YoY in 2021. Excluding businesses acquired in 2021, allowance for doubtful accounts increased 37% YoY in 4Q21, reflecting the increase in accounts receivables due to the strong commercial cycle for 2022, and decreased 27% YoY in 2021, reflecting improved cash collection processes.

• The quality of Arco’s receivables profile and strong credit and collection processes reduced allowance for doubtful accounts back to historical levels. Throughout the COVID-19 pandemic, Arco supported its partner schools through the extension of payment terms. Delinquency also dropped to 4.1% in 2021, from 6.7% in 2020, and the coverage index remained at 13% in 2021 (flat versus 2020) and 15%, excluding receivables from transactions with no credit risk such as direct sales to parents using credit cards (also flat versus 2020).

Allowance for doubtful accounts (R$ MM)		4Q21		4Q20		YoY		3Q21		QoQ
Allowance for doubtful accounts		(10.1)		(6.5)		57%		(6.0)		69%
% of Revenues		-2.2%		-2.2%		0.0 p.p.		-3.3%		1.1 p.p.
Allowance for doubtful accounts adjusted for COVID impact¹		(10.1)		(4.4)		130%		(6.0)		69%
% of Revenues		-2.2%		-1.5%		0.7 p.p.		-3.3%		1.1 p.p.

1)

Calculated excluding COVID-19 impact on allowance for doubtful accounts to better reflect a normalized level of this line.

• Higher G&A expenses excluding depreciation and amortization in 4Q21 and 2021 reflect (i) expenses related to businesses acquired in 2021, (ii) non-recurring third-party services related to these new businesses (mainly COC/Dom Bosco), and (iii) a fair value update related to Geekie’s SOP¹ (management stock option plan). Excluding the impact of these businesses, G&A contracted 6% YoY in 4Q21 and increased 10% YoY in 2021. Excluding RSU expenses, G&A contracted 7% YoY in 4Q21 and increased 8% YoY in 2021 (contracted 17% YoY in 4Q21 and increased 4% YoY in 2021 excluding acquired businesses), reflecting initial efforts towards increased efficiency.

1)

When Arco acquired Geekie in 2016, as part of the transaction Arco acquired Geekie’s management future stake in Geekie, resulting from the exercise of their existing SOP. The fair value of the SOP is calculated using the same valuation method as the accounts payable to selling shareholders for the acquisition of the remaining interest, resulting in the final transaction price, which are updated quarterly for Geekie’s most recent fair value, until its effective settlement in 2022. As a result of Geekie’s recent strong commercial performance, its updated fair value impacted both the SOP and accounts payable to selling shareholders.

• Adjusted EBITDA was R$224.4 million in 4Q21, +78% YoY, and R$430.9 million in 2021, +13% YoY. As a result, the adjusted EBITDA margin was 48.7% in the quarter versus 42.5% in 4Q20, and 35.0% in 2021 versus 38.0% in 2020. Excluding the effect of businesses acquired in 2021, which were not included in the margin guidance, adjusted EBITDA margin for 2021 was 36.0% for 2021, within the 35.5% and 37.5% margin guidance.

• Adjusted net income in 4Q21 was R$88.7 million, 25% above 4Q20, with an adjusted net margin of 19.2%. In 2021, adjusted net income totaled R$132.9 million, 32% below 2020, impacted by lower revenue recognition in the first 9 months of 2021 and higher finance expenses, leading to an adjusted net margin of 10.8%. For purposes of the calculation of adjusted net income for 2021, we have excluded certain adjustments that we applied to the calculation of adjusted net income for prior periods. These adjustments will not be applied to the calculation of adjusted net income going forward. The adjustments are as follows: (i) Interest on acquisition of investments linked to a fixed rate, as it is similar to the cost of a finance line in which proceeds are used in M&A activities; (ii) Foreign exchange on cash and cash equivalents, as it is part of Arco’s cash management as an FPI; and (iii) Share of loss of equity‑accounted investees, as despite not being controlled by Arco, these businesses are strategic to the company. We believe that eliminating these adjustments from our calculation of adjusted net income for 2021 and going forward does not impact investors’ ability to assess our operational results. We note that we have not retroactively restated net adjusted income for periods prior to 2021, but that we are excluding these adjustments from adjusted net income for 4Q20 and 2020 as indicated/ presented in this press release for comparison purposes only.

• Arco delivered a healthy operating profit in 2021, but the year required strategical use of cash with a long-term mindset. Cash flow from operations was mainly impacted by working capital: (i) higher receivables reflect the strong growth for 2022 and the addition of COC & Dom Bosco to the portfolio; and (ii) higher inventory as a result of the student dropouts at our partner schools associated with the COVID-19 pandemic. The free cash flow was impacted by higher CAPEX as: (i) despite lower-than-expected revenues in 2021, our investment plan for content development and technology remained a priority as we prepared to benefit from the expected positive scenario post- COVID-19 pandemic; and (ii) we had a one-time PP&E addition due to a temporary change to the financing format of one of Geekie’s product, initial investments in COC & Dom Bosco and ArcoTech.

Quarter analysis

Free cash flow (R$ MM)		4Q21		4Q20		YoY		3Q21		QoQ
Cash generated from operations		(138.4)		(49.9)		177%		74.1		-287%
(-) Income tax paid		(1.9)		(4.6)		-59%		(19.2)		-90%
(-) Interest paid on lease liabilities		(0.8)		(0.9)		-15%		(0.9)		-16%
(-) Interest paid on investment acquisition		(8.4)		(0.1)		n.a.		(1.0)		719%
(-) Interest paid on loans and financing		(6.9)		(3.6)		93%		(5.5)		26%
(-) Payments for contingent consideration		(3.5)		(5.8)		-40%		-		-
Cash Flow from Operating Activities		(159.8)		(65.0)		146%		47.6		-436%
(-) Acquisition of property, plant and equipment		(50.5)		(5.2)		880%		(4.0)		1,160%
(-) Acquisition of intangible assets		(46.6)		(33.8)		38%		(35.2)		32%
Free cash flow		(257.0)		(103.9)		147%		8.4		n.a.

Annual analysis

Free cash flow (R$ MM)		2021		2020		YoY
Cash generated from operations		138.2		212.6		-35%
(-) Income tax paid		(72.6)		(95.1)		-24%
(-) Interest paid on lease liabilities		(3.3)		(2.1)		57%
(-) Interest paid on investment acquisition		(13.7)		(0.2)		n.a.
(-) Interest paid on loans and financing		(20.3)		(13.4)		51%
(-) Payments for contingent consideration		(3.8)		(9.5)		-60%
Cash Flow from Operating Activities		24.5		92.4		-73%
(-) Acquisition of property, plant and equipment		(60.1)		(10.8)		455%
(-) Acquisition of intangible assets		(151.3)		(96.8)		56%
Free cash flow		(186.9)		(15.3)		n.a.

Trade Receivables - Aging (R$ MM)	4Q21	4Q20	YoY	3Q21	QoQ
Neither past due nor impaired	567.5	360.7	57%	246.7	130%
1 to 60 days	15.4	26.2	-41%	34.8	-56%
61 to 90 days	8.4	10.0	-16%	13.0	-35%
91 to 120 days	10.3	10.5	-2%	10.7	-4%
121 to 180 days	16.3	18.9	-14%	14.5	13%
More than 180 days	62.5	52.4	19%	62.7	0%
Trade receivables	680.4	478.7	42%	382.3	78%

Days of sales outstanding	4Q21	4Q20	YoY	3Q21	QoQ
Trade receivables (R$ MM)	680.4	478.7	42.1%	382.3	78.0%
(-) Allowance for doubtful accounts	(87.1)	(63.4)	37.4%	(77.1)	13.0%
Trade receivables, net (R$ MM)	593.3	415.3	42.9%	305.1	94.4%
Net revenue LTM pro-forma¹	1,328.3	1,079.7	23.0%	1,078.5	23.2%
Adjusted DSO	163	140	16.1%	103	57.9%

1)

Calculated as net revenues for the last twelve months added to the pro forma revenues from businesses acquired in the period to accurately reflect the Company’s operations.

CAPEX (R$ MM)¹	4Q21	4Q20	Var. YoY	3Q21	Var. QoQ
Acquisition of intangible assets	46.6	33.8	38%	35.2	32%
Educational platform - content development	6.6	2.4	175%	11.5	-42%
Educational platform - platforms and educational technology	25.0	22.8	10%	10.5	138%
Software	13.2	5.8	129%	10.7	23%
Copyrights and others	1.8	2.8	-36%	2.5	-29%
Acquisition of property, plant and equipment	50.5	5.1	888%	4.0	1160%
TOTAL	97.1	38.9	150%	39.2	148%

1)

Excluding the effect of business combinations.

CAPEX (R$ MM)¹	2021	2020	Var. YoY
Acquisition of intangible assets	151.3	96.8	56%
Educational platform - content development	75.5	51.3	47%
Educational platform - platforms and educational technology	23.2	14.9	56%
Software	43.6	22.1	97%
Copyrights and others	9.0	8.6	5%
Acquisition of property, plant and equipment	60.1	10.8	455%
TOTAL	211.4	107.6	96%

• Arco’s corporate restructuring is ongoing. We expect to incorporate the recently acquired COC/Dom Bosco in 2022, followed by Pleno and Escola da Inteligência. As we keep incorporating other businesses into CBE (Companhia Brasileira de Educação e Sistemas de Ensino, our wholly owned entity which incorporates acquired businesses) we will be able to capture additional tax benefits and therefore expect to further reduce our effective tax rate, currently at 17.8% for 2021 (versus 25.5% for 2020).

Intangible assets - net balances (R$ MM)		4Q21		4Q20		YoY		3Q21		QoQ
Business Combination		2,992.4		2,395.8		25%		2,334.6		28%
Trademarks		488.7		449.0		9%		437.3		12%
Customer relationships		274.7		283.8		-3%		261.4		5%
Educational system		242.0		231.8		4%		209.6		15%
Softwares		11.0		6.3		75%		11.4		-4%
Educational platform		6.9		13.1		-47%		5.7		20%
Others¹		19.3		17.5		10%		16.4		18%
Goodwill		1,949.9		1,394.4		40%		1,392.8		40%
Operational		265.2		153.9		72%		206.5		28%
Educational platform²		192.0		113.0		70%		141.7		36%
Softwares		61.7		29.3		110%		53.0		16%
Copyrights		11.4		11.4		1%		11.8		-3%
Customer relationships		0.1		0.1		-44%		0.1		-17%
TOTAL		3,257.6		2,549.6		28%		2,541.2		28%

Amortization of intangible assets (R$ MM)		4Q21		4Q20		YoY		3Q21		QoQ
Business Combination		(59.5)		(52.0)		14%		(55.7)		7%
Trademarks		(7.3)		(5.2)		40%		(6.5)		13%
Customer relationships		(9.7)		(6.5)		49%		(8.6)		13%
Educational system		(9.4)		(7.3)		29%		(8.1)		16%
Softwares		(0.5)		(0.7)		-35%		(0.9)		-49%
Educational platform		(0.1)		(0.1)		83%		(0.3)		-54%
Others¹		(0.5)		(2.1)		-73%		(1.3)		-58%
Goodwill		(31.9)		(30.1)		6%		(30.1)		6%
Operational		(27.2)		(15.1)		80%		(22.8)		19%
Educational platform²		(19.8)		(9.4)		110%		(16.3)		21%
Softwares		(4.5)		(3.9)		17%		(4.5)		1%
Copyrights		(2.0)		(1.8)		12%		(2.0)		0%
Customer relationships		(0.9)		(0.0)		n/a		-		n/a
TOTAL		(86.6)		(67.1)		29%		(78.5)		10%

1)		Non-compete agreements and rights on contracts.
2)		Includes content development in progress.

Amortization of intangible assets		Impacts		Originates		Amortizations with tax benefit in
(R$ MM)		P&L		tax		4Q21²
				benefit		Amortization		Tax benefit		Impact on net income
Business Combination						(47,2)		16,0		(31,1)
Trademarks		Yes		Yes²		(4,1)		1,4		(2,7)
Customer relationships		Yes		Yes²		(5,3)		1,8		(3,5)
Educational system		Yes		Yes²		(5,1)		1,7		(3,4)
Educational platform		Yes		Yes²		(0,2)		0,1		(0,1)
Others¹		Yes		Yes²		(0,5)		0,2		(0,3)
Goodwill		No		Yes²		(31,9)		10,9		(21,1)
Operational		Yes		Yes		(27,2)		9,2		(17,9)
TOTAL						(74,3)		25,3		(49,1)

1)		Non-compete agreements and rights on contracts.
2)		Amortizations are tax deductible only after the incorporation of the acquired business. In 4Q21, 29% of the balance of the intangible assets from business combinations generates tax benefits.

Amortization of intangible assets from business combination that generate tax benefit - schedule (R$ MM)		Businesses with current tax benefit										Undefined¹
		2022		2023		2024		2025		2026 +
Trademarks		19		20		20		20		277		128
Customer relationships		21		25		25		25		59		111
Educational system		25		27		27		27		106		32
Software license		-		-		-		-		-		11
Rights on contracts		1		1		1		1		3		1
Others		2		2		2		1		1		10
Goodwill		202		239		234		230		382		514
Total		270		314		308		303		828		808
Maximum tax benefit		92		107		105		103		281		275

1)

Businesses with future tax benefit (incorporation process to begin).

Amortization of intangible assets from business combination that generate tax benefit - schedule (R$ MM)		Businesses with current tax benefit										Undefined¹
		2022		2023		2024		2025		2026 +
NAVE		8		9		9		9		8		-
P2D²		82		126		126		126		227		-
Positivo		170		170		170		169		593		-
Other Companies		10		10		4		0		0		808
Total		270		314		308		303		828		808
Maximum tax benefit		92		107		105		103		281		275

1)		Businesses with future tax benefit (incorporation process to begin).
2)		Refer to COC and Dom Bosco solutions acquired in 2021.

• Arco’s cash and cash equivalents plus financial investments position of R$1,184 million is currently adequate to meet obligations for the year of R$1,028 million in debt and accounts payable to selling shareholders. Arco finished the period with a Net Debt/Adjusted EBITDA of 3.9x and we expect this ratio to gradually decrease as Arco generates more cash on the back of stronger results. As a subsequent event, on January 3, 2022, Arco repaid a loan in full through one of its subsidiaries in the amount of R$202 million.

• We had a very strong commercial cycle outcome for the 2022 school year, with a clear acceleration in the pace of organic growth versus 2020, as the COVID-19 pandemic scenario in Brazil improved significantly. Our 2022 ACV bookings were R$1,560 million, above the guidance range of R$1,475 million to R$1,515 million provided in the 3Q21 earnings release, representing a 46% growth versus 2021 pro forma net revenues of R$1,069 million (2021 cycle net revenues of R$1,057 million plus annualized revenues of businesses acquired in 2021 of R$12 million), or 32% organic growth. We are confident we will be able to recognize revenues in line with ACV bookings in 2022 as partner schools gradually see their operations return to full capacity.

• Arco’s main priorities for 2022 include:

1) Use the power of our platform to boost growth;
2) Integrate to unlock efficiencies and benefits of scale;
3) Improve cash generation to strengthen our balance sheet and allow for future investments​; and
4) Continue expanding disclosure on ESG initiatives and increase our impact​.

• Arco has today released its 2021 ESG report, in which we are detailing our 2025 Goals, listing our projects to achieve it, and updating the main metrics in our three material pillars:

Impact on Education: We have increased our number of students in 2022 to 2.3 mm from 1.8 mm in 2021; our core NPS increased to 84 from 82; and students approved in universities through SISU grew 27%. Our priorities for the year are to measure the evolution in learning in our partner schools and increase the number of students learnings 21st century skills.

Focus on People: We are launching two internal initiatives regarding diversity: a mentoring program among senior female leaders and other women in the path to assume those positions and a Racial Diversity Learning Group to expand our teams’ knowledge on the theme. Our priorities for the year are to reduce the turnover, increase the employees’ NPS and strengthen our diversity programs.

Strong & Sustainable Structure: We have reduced in 72% the number of our suppliers aiming increased efficiency and sustainability in our supply chain, and our paper is 100% FSC certified. Our priorities for the year are to map our paper life cycle and to start measuring our carbon emissions.

For further information, please see our 2021 ESG Report published on our IR website (https://investor.arcoplatform.com/esg/).

Conference Call Information

Arco will discuss its fourth quarter and fiscal year 2021 results today, March 31, 2022, via a conference call at 6 p.m. Eastern Time (7 p.m. Brasilia Time). To access the call, please dial: [phone], [phone] or [phone]. An audio replay of the call will be available through April 6, 2021, by dialing [phone] and entering access code 1608874#. A live and archived webcast of the call will be available on the Investor Relations section of the Company’s website at https://investor.arcoplatform.com/.

Information related to COVID-19 pandemic

As of December 31, 2021, there was a total net impact of R$1,798 thousand on the Company's condensed consolidated financial statements related to the COVID-19 pandemic, mainly related to: (i) additional expenses of R$2,071 thousand related to health care in food and emotional health programs provided to the Company’s employees, and (ii) savings on rent concessions, in connection with leased buildings, as a direct consequence of the COVID-19 pandemic, amounting to R$273 thousand.

The Company assessed the existence of potential impairment indicators and the possible impacts on the key assumptions and projections caused by the pandemic on the recoverability of long-lived assets and concluded that there are no indications that demonstrate the need to recognize a provision for impairment of long-lived assets in the consolidated financial statements.

The future impact of the COVID-19 pandemic on an ongoing basis is still uncertain, and the Company’s management team will continue to closely monitor and assess the potential impacts it may have on the Company’s business, its financial performance and position.

For full disclosure regarding the COVID-19 discussion, please refer to the December 31, 2021, condensed consolidated financial statements submitted to the Securities and Exchange Commission on Form 6-K.

About Arco Platform Limited (Nasdaq: ARCE)

Arco has empowered hundreds of thousands of students to rewrite their futures through education. Our data-driven learning methodology, proprietary adaptable curriculum, interactive hybrid content, and high-quality pedagogical services allow students to personalize their learning experience while enabling schools to thrive.

Forward-Looking Statements

This press release contains forward-looking statements as pertains to Arco Platform Limited (the “Company”) within the meaning of the Private Securities Litigation Reform Act of 1995, including, but not limited to, the Company’s expectations or predictions of future financial or business performance conditions. The achievement or success of the matters covered by statements herein involves substantial known and unknown risks, uncertainties, and assumptions, including with respect to the COVID-19 pandemic. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, the Company’s results could differ materially from the results expressed or implied by the statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward looking statements are made based on the Company’s current expectations and projections relating to its financial conditions, result of operations, plans, objectives, future performance and business, and these statements are not guarantees of future performance.

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

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

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

Key Business Metrics

ACV Bookings: we define ACV Bookings as the revenue we would contractually expect to recognize from a partner school in each school year pursuant to the terms of our contract with such partner school, assuming no further additions or reductions in the number of enrolled students that will access our content at such partner school in such school year (we define “school year” for purposes of calculation of ACV Bookings as the twelve-month period starting in October of the previous year to September of the mentioned current year). We calculate ACV Bookings by multiplying the number of enrolled students at each partner school with the average ticket per student per year; the related number of enrolled students and average ticket per student per year are each calculated in accordance with the terms of each contract with the related partner school.

Non-GAAP Financial Measures

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

We calculate Adjusted EBITDA as profit (loss) for the year (or period) plus/minus income taxes, plus/minus finance result, plus depreciation and amortization, plus/minus share of (profit) loss of equity-accounted investees, plus share-based compensation plan and restricted stock units, plus provision for payroll taxes (restricted stock units), plus M&A expenses, plus non-recurring expenses and plus effects related to COVID-19 pandemic. We calculate Adjusted EBITDA Margin as Adjusted EBITDA divided by Net Revenue.

We calculate Adjusted Net Income as profit (loss) for the year plus share-based compensation plan, restricted stock units and related payroll taxes (restricted stock units) plus amortization of intangible assets from business combinations (which refers to the amortization of the following intangible assets from business combinations: (i) rights on contracts, (ii) customer relationships, (iii) educational system, (iv) trademarks, (v) non-compete agreement and (vi) software resulting from acquisitions), plus/minus changes in fair value of derivative instruments (which refers to (i) changes in fair value of derivative instruments—finance income, plus (ii) changes in fair value of derivative instruments—finance costs), plus/minus changes in accounts payable to selling shareholders (which refers to changes in fair value of contingent consideration and accounts payable to selling shareholders—finance costs), plus interest income (expenses), net (which refers to interest expenses related to accounts payable to selling shareholders from business combinations adjusted by fair value), plus/minus changes in current and deferred tax recognized in statements of income applied to all adjustments to net income (which refers to tax effects of changes in deferred tax assets and liabilities recognized in profit or loss corresponding to financial instruments from acquisition of interests, tax benefit from tax deductible goodwill, share-based compensation and amortization of intangible assets), plus M&A expenses (which refers to non-recurring expenses related to the acquisitions of the year), plus non-recurring expenses, which are related to legal services (mainly due to International School arbitration) and consulting expenses for Sarbanes-Oxley implementation, plus effects related to COVID-19 pandemic, which includes the revision of the Company’s estimated credit losses from its trade receivables based on expected increases in financial default and in unemployment rates in Brazil for the year.

For purposes of the calculation of Adjusted Net Income for the year ended December 31, 2021, we have excluded the following adjustments that we applied to the calculation of Adjusted Net Income for prior periods: (i) Foreign exchange effects on cash and cash equivalents; (ii) share of loss of equity‑accounted investees and (iii) Interest income (expenses) linked to a fixed rate (we will maintain the adjustment for Interest income (expenses) that refers to adjustments by fair value). These adjustments will not be applied to the calculation of Adjusted Net Income going forward. We believe that eliminating these adjustments from our calculation of Adjusted Net Income for the year ended December 31, 2021 and going forward does not impact our investors’ ability to assess our results of operations. We have not retroactively restated Net Adjusted Income for the periods prior to 2021.

We calculate Free Cash Flow as Net Cash Flows from Operating activities, less acquisition of property and equipment, less acquisition of intangible assets. We consider Free Cash Flow to be a liquidity measure that provides useful information to management and investors about the amount of cash generated by operating activities and cash used for investments in property and equipment required to maintain and grow our business.

We calculate Taxable Income Reconciliation as profit (loss) for the year (or period) adjusted for permanent and temporary additions and exclusions (for example, adjustments to provisions and amortizations in the period) and for all tax benefits that Arco is entitled to (for example, goodwill). The effective tax rate will be the current taxes for the period divided by the taxable income. In Brazil, taxes are charged based on the taxable income, not the accounting income, which means companies can have an accounting loss and a taxable profit. Additionally, Arco owns several companies and taxes are calculated individually.

We understand that, although Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin, Free Cash Flow and Taxable Income Reconciliation are used by investors and securities analysts in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation or as substitutes for analysis of our results of operations as reported under IFRS. Additionally, our calculations of Adjusted EBITDA, Adjusted EBITDA Margin, Adjusted Net Income, Adjusted Net Income Margin, Free Cash Flow and Taxable Income Reconciliation 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.

Arco Platform Limited
Consolidated Statements of Financial Position
		December 31,		December 31,
(In thousands of Brazilian reais)		2021		2020
Assets
Current assets
Cash and cash equivalents		211,143		424,410
Financial investments		973,294		712,645
Trade receivables		593,263		415,282
Inventories		158,582		74,076
Recoverable taxes		38,811		19,304
Derivative financial instruments assets		301		-
Related parties		4,571		9,970
Other assets		66,962		24,073
Total current assets		2,046,927		1,679,760
Non-current assets
Deferred income tax		321,223		236,903
Recoverable taxes		22,216		1,121
Financial investments		40,762		10,349
Derivative financial instruments assets		560		-
Related parties		6,819		10,508
Other assets		57,534		22,239
Investments and interests in other entities		126,873		9,654
Property and equipment		73,885		26,087
Right-of-use assets		35,960		30,022
Intangible assets		3,257,360		2,549,637
Total non-current assets		3,943,192		2,896,520
Total assets		5,990,119		4,576,280

		December 31,		December 31,
(In thousands of Brazilian reais)		2021		2020
Liabilities
Current liabilities
Trade payables		103,292		40,925
Labor and social obligations		157,601		85,069
Taxes and contributions payable		7,953		9,676
Income taxes payable		37,775		44,731
Advances from customers		35,291		23,080
Lease liabilities		20,122		12,742
Loans and financing		228,448		107,706
Accounts payable to selling shareholders		799,553		656,014
Other liabilities		3,176		331
Total current liabilities		1,393,211		980,274
Non-current liabilities
Labor and social obligations		661		36,570
Lease liabilities		22,996		22,478
Loans and financing		1,602,879		203,413
Derivative financial instruments liabilities		223,561		-
Provision for legal proceedings		1,398		1,366
Accounts payable to selling shareholders		869,233		1,130,501
Other liabilities		946		794
Total non-current liabilities		2,721,674		1,395,122
Equity
Share capital		11		11
Capital reserve		2,203,857		2,200,645
Treasury shares		(180,775)		-
Share-based compensation reserve		90,813		80,817
Accumulated losses		(238,672)		(80,589)
Total equity		1,875,234		2,200,884
Total liabilities and equity		5,990,119		4,576,280

Arco Platform Limited
Consolidated Statements of Income
	Three months period ended December 31,				Twelve months period ended December 31,
(In thousands of Brazilian reais, except earnings per share)	2021		2020		2021		2020
Net revenue	460,834		296,537		1,232,074		1,001,710
Cost of sales	(94,413)		(66,305)		(294,407)		(221,130)
Gross profit	366,421		230,232		973,667		780,580
Operating expenses:
Selling expenses	(142,931)		(97,687)		(496,298)		(372,269)
General and administrative expenses	(82,482)		(71,528)		(328,643)		(270,558)
Other income (expenses), net	13,760		(6,251)		16,673		(2,258)
Operating profit	154,768		54,766		129,399		135,495
Finance income	48,805		9,614		91,212		45,211
Finance costs	(162,847)		(28,110)		(372,086)		(142,013)
Finance result	(114,042)		(18,496)		(280,874)		(96,802)
Share of (loss) profit of equity-accounted investees	(13,856)		8,450		(22,182)		409
Profit (loss) before income taxes	26,870		44,720		(173,657)		39,102
Income taxes - income (expense)
Current	(28,466)		(18,538)		(65,609)		(87,379)
Deferred	(4,219)		(1,979)		81,183		65,057
Total income taxes – income (expense)	32,685		(20,517)		15,574		(22,322)
(Loss) profit for the period	(5,815)		24,203		(158,083)		16,780
Basic earnings per share – in Brazilian reais
Class A	(0.10)		0.42		(3.18)		(0.30)
Class B	(0.10)		0.42		(3.18)		(0.30)
Diluted earnings per share – in Brazilian reais
Class A	(0.10)		0.42		(3.18)		(0.30)
Class B	(0.10)		0.42		(3.18)		(0.30)
Weighted-average shares used to compute net (loss) profit per share:
Basic	56,459		58,218		49,701		55,758
Diluted	56,601		58,379		49,843		55,919

Arco Platform Limited
Consolidated Statements of Cash Flows
	Three months period ended December 31,				Twelve months period ended December 31,
(In thousands of Brazilian reais)	2021		2020		2021		2020
Operating activities
Profit (loss) before income taxes	26,870		44,720		(173,657)		39,102
Adjustments to reconcile loss before income taxes
Depreciation and amortization	58,805		37,692		194,885		127,455
Inventory reserves	13,813		4,114		26,778		7,453
Allowance for doubtful accounts	10,124		6,451		26,610		34,684
Loss on sale/disposal of property and equipment and intangible assets disposed	686		2,753		908		4,277
Fair value change in financial instruments	37,291		(124)		37,291		(562)
Changes in accounts payable to selling shareholders	12,667		458		87,820		20,330
Share of profit (loss) of equity-accounted investees	13,856		(8,450)		22,182		(409)
Share-based compensation plan	12,812		21,024		70,127		36,333
Accrued interest on loans and financing	36,635		3,810		57,245		19,862
Interest accretion on acquisition liability	36,785		18,389		121,611		68,379
Income from financial investments	(11,014)		(3,532)		(25,930)		(13,388)
Interest on lease liabilities	1,434		976		4,795		3,036
Provision for legal proceedings	(186)		(7)		(149)		587
Provision for payroll taxes (restricted stock units)	(2,451)		(1,831)		235		(2,997)
Foreign exchange (loss) income	(375)		183		1,772		(188)
Changes in fair value of step acquisitions	-		3,555		-		307
Gain on changes of interest of investment	(14,022)		-		(14,022)		-
Other financial cost/revenue, net	(570)		(466)		(1,276)		(2,315)
	233,160		129,715		437,225		341,946
Changes in assets and liabilities
Trade receivables	(280,451)		(148,908)		(184,472)		(108,087)
Inventories	(43,873)		(10,109)		(62,212)		(18,161)
Recoverable taxes	(36,203)		7,970		(39,199)		3,512
Other assets	(41,571)		(6,768)		(62,802)		(14,087)
Trade payables	23,881		7,677		52,915		3,886
Labor and social obligations	(17,965)		(37,593)		(6,640)		7,239
Taxes and contributions payable	3,881		(8,650)		(2,590)		1,147
Advances from customers	28,239		17,292		11,665		(2,981)
Other liabilities	(7,454)		(533)		(5,724)		(1,420)
Cash (used in) generated from operations	(138,356)		(49,907)		138,166		212,634
Income taxes paid	(1,880)		(4,641)		(72,564)		(95,053)
Interest paid on lease liabilities	(773)		(914)		(3,294)		(2,100)
Interest paid on investment acquisition	(8,446)		(140)		(13,700)		(187)
Interest paid on loans and financing	(6,869)		(3,556)		(20,275)		(13,423)
Payments for contingent consideration	(3,505)		(5,824)		(3,837)		(9,520)
Net cash flows (used in) generated from operating activities	(159,829)		(64,982)		24,496		92,351
Investing activities
Acquisition of property and equipment	(50,536)		(5,159)		(60,078)		(10,822)
Payment of investments and interests in other entities	1,487		-		(125,273)		(32,628)
Acquisition of subsidiaries, net of cash acquired	(764,849)		(182,284)		(795,905)		(204,286)
Payment of accounts payable to selling shareholders	(1)		-		(101,286)		-
Acquisition of intangible assets	(46,585)		(33,758)		(151,318)		(98,827)
(Purchase) maturity of financial investments	(631,441)		192,028		(265,132)		(130,113)
Loans to related parties	5,000		(5,000)		5,000		5,000
Net cash flows generated from (used in) investing activities	1,486,925		(34,173)		(1,493,992)		(479,676)

Financing activities
Capital increase proceeds from public offering	-		-		-		591,898
Share issuance costs	-		1,240		-		(16,291)
Purchase of treasury shares	(65,945)		-		(200,751)		-
Payment of lease liabilities	(5,130)		(2,782)		(15,729)		(8,510)
Payment to owners to acquire entity’s shares	(174,499)		(779)		(193,954)		(1,733)
Financial derivatives	185,409		-		185,409		-
Loans and financing	593,842		2,301		1,490,065		200,912
Loans and financing transaction costs	(13,032)		(3,076)		(21,582)		(3,629)
Net cash flows from (used in) financing activities	520,645		(3,096)		1,243,458		762,647
Foreign exchange effects on cash and cash equivalents	14,918		(183)		12,771		188
(Decrease) increase in cash and cash equivalents	(1,111,191)		(102,434)		(213,267)		375,510
Cash and cash equivalents at the beginning of the period	1,322,334		526,844		424,410		48,900
Cash and cash equivalents at the end of the period	211,143		424,410		211,143		424,410
(Decrease) increase in cash and cash equivalents	(1,111,191)		(102,434)		(213,267)		375,510

Arco Platform Limited
Reconciliation of Non-GAAP Measures
		Three months period ended December 31,				Twelve months period ended December 31,
(In thousands of Brazilian reais)		2021		2020		2021		2020
Adjusted EBITDA Reconciliation
(Loss) profit for the period		(5,815)		24,203		(158,083)		16,780
(+/-) Income taxes		32,685		20,517		(15,574)		22,322
(+/-) Finance result		114,042		18,496		280,874		96,802
(+) Depreciation and amortization		58,805		37,692		194,885		127,455
(+) Share of profit (loss) of equity-accounted investees		13,856		(8,450)		22,182		(409)
EBITDA		213,573		92,458		324,284		262,950
(+) Share-based compensation plan and restricted stock units		12,812		21,025		70,127		36,463
(+) Provision for payroll taxes (restricted stock units)		10,937		(2,459)		17,663		33,383
(+) M&A expenses		(13,005)		9,994		16,050		29,952
(+) Non-recurring expenses		(339)		805		609		3,287
(+) Effects related to Covid-19 pandemic		425		4,075		2,121		14,990
Adjusted EBITDA		224,403		125,898		430,854		381,025
Net Revenue		460,834		296,537		1,232,074		1,001,710
EBITDA Margin		46.3%		31.2%		26.3%		26.3%
Adjusted EBITDA Margin		48.7%		42.5%		35.0%		38.0%

		Three months period ended December 31,						Twelve months period ended December 31,
(In thousands of Brazilian reais)		2021		2020 pro forma²		2020 reported		2021		2020 pro forma²		2020 reported
Adjusted Net Income (Loss) Reconciliation
Loss for the period		(5,815)		24,203		24,203		(158,083)		16,780		16,780
(+) Share-based compensation plan and restricted stock units (RSU)		12,812		21,025		18,566		70,127		36,463		69,846
(+) Provision for payroll taxes (RSU)		10,937		(2,459)		-		17,663		33,383		-
(+) Amortization of intangible assets from business combinations		27,844		21,349		21,349		103,194		76,067		76,067
(+/-) Changes in fair value of derivative instruments		(861)		(124)		(124)		(861)		(562)		(562)
(+/-) Changes in fair value of derivative instruments (convertible notes)		40,086		-		-		40,086		-		-
(+/-) Changes in accounts payable to selling shareholders		12,667		458		458		87,820		20,330		20,330
(+/-) Tax effects		(13,412)		(21,706)		(21,706)		(117,205)		(76,898)		(76,898)
(+) Interest on acquisition of investments, net (adjusted by fair value)1		17,406		13,380		18,049		71,385		41,626		67,058
(+) M&A expenses		(13,005)		9,994		8,063		16,050		29,952		13,751
(+) Non-recurring expenses		(339)		805		2,736		609		3,287		19,488
(+) Effects related to Covid-19 pandemic		425		4,075		4,075		2,121		14,990		14,990
(+) Share of loss (profit) of equity-accounted investees		-		-		(8,450)		-		-		(409)
(+/-) Foreign exchange on cash and cash equivalents		-		-		183		-		-		(188)
Adjusted Net Income (Loss)		88,745		71,000		67,402		132,906		195,418		220,253
Net Revenue		460,834		296,537		296,537		1,232,074		1,001,710		1,001,710
Adjusted Net Income (Loss) Margin		19.3%		23.9%		22.7%		10.8%		19.5%		22.0%

1)		Refer to interest expense on liabilities related to business combinations and investments in associates that are adjusted by the fair value of the acquired business.
2)		Adjusted Net Income excluding the following adjustments: (i) Interest on acquisition of investments linked to a fixed rate; (ii) Foreign exchange on cash and cash equivalents; and (iii) Share of loss of equity‑accounted investees. For comparison purposes only.

		Three months period ended December 31,				Twelve months period ended December 31,
(In thousands of Brazilian reais)		2021		2020		2021		2020
Free Cash Flow Reconciliation
Cash generated from operations		(138,356)		(49,907)		138,166		212,634
(-) Income tax paid		(1,880)		(4,641)		(72,564)		(95,053)
(-) Interest paid on lease liabilities		(773)		(914)		(3,294)		(2,100)
(-) Interest paid on investment acquisition		(8,446)		(140)		(13,700)		(187)
(-) Interest paid on loans and financing		(6,869)		(3,556)		(20,275)		(13,423)
(-) Payments for contingent consideration		(3,505)		(5,824)		(3,837)		(9,520)
Cash Flow from Operating Activities		(158,829)		(64,982)		24,496		92,351
(-) Acquisition of property and equipment		(50,536)		(5,159)		(60,078)		(10,822)
(-) Acquisition of intangible assets		(46,585)		(33,758)		(151,318)		(96,827)
Free Cash Flow		(256,950)		(103,899)		(186,900)		(15,298)

		Three months period ended December 31,				Twelve months period ended December 31,
(In thousands of Brazilian reais)		2021		2020		2021		2020
Taxable Income Reconciliation
Loss before income taxes		26,870		44,720		(173,657)		39,102
(+) Share-based compensation plan, RSU and provision for payroll taxes¹		(5,469)		(4,307)		48,496		17,572
(+) Amortization of intangible assets from business combinations before incorporation¹		12,147		(701)		22,632		33,504
(+/-) Changes in accounts payable to selling shareholders¹		36,125		12,604		167,709		66,784
(+/-) Share of loss of equity‑accounted investees		13,856		(8,450)		22,182		(409)
(+) Net income from Arco Platform (Cayman)		36,637		4,804		53,408		16,922
(+) Fiscal loss without deferred		4,270		680		13,205		4,923
(+/-) Provisions booked in the period		37,846		(1,631)		47,627		39,394
(+) Tax loss carryforward		(43,473)		30,184		125,566		113,856
(+) Others		24,149		4,639		42,017		11,065
Taxable income		142,958		82,542		369,185		342,713
Current income tax under actual profit method		(48,606)		(28,066)		(125,523)		(116,523)
% Tax rate under actual profit method		34.0%		34.0%		34.0%		34.0%
(+) Effect of presumed profit benefit		-		4,877		3,266		9,552
Effective current income tax		(48,606)		(23,189)		(122,257)		(106,971)
% Effective tax rate		34.0%		28.1%		33.1%		31.2%
(+) Recognition of tax-deductible amortization of goodwill and added value²		11,361		10,721		44,163		20,000
(+/-) Other additions (exclusions)		8,779		(6,070)		12,485		(408)
Effective current income tax accounted for goodwill benefit		(28,466)		(18,538)		(65,609)		(87,379)
% Effective tax rate accounting for goodwill benefit		19.9%		22.5%		17.8%		25.5%

1)		Temporary differences between the carrying amount of an asset or liability in the balance sheet and its tax base that will yield amounts that can be deducted in the future when determining taxable profit or loss.
2)		Added value refers to the fair value of intangible assets from business combinations.

 

View source version on businesswire.com: https://www.businesswire.com/news/home/20220331005255/en/