Arco reports fourth quarter and full year 2021 results
SÃo paulo--(business wire)--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. 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. 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: +1 (412) 717-9627, +1 (844) 204-8942 or +55 (11) 4090-1621. an audio replay of the call will be available through april 6, 2021, by dialing +55 (11) 3193-1012 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.
