As confidentially submitted to the Securities and Exchange Commission on June 3 , 2020. This draft registration statement has not been publicly filed with the Securities and Exchange Commission and all information herein remains strictly confidential.
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
THE SECURITIES ACT OF 1933
(Exact Name of Registrant as Specified in its Charter)
|The Cayman Islands||8200||N/A|
|(State or other jurisdiction of
incorporation or organization)
|(Primary Standard Industrial
Classification Code Number)
Rodovia José Carlos Daux, 5500, Torre Jurerê A, 2nd floor, Saco Grande, Florianópolis, State of Santa Catarina, 88032-005, Brazil
+55 (47) 3281-9500
|(Address, Including Zip Code, and Telephone Number, Including Area Code, of Registrant’s Principal Executive Offices)|
|Cogency Global Inc.
122 East 42nd Street, 18th Floor
New York, NY 10168
(Name, address, including zip code, and telephone number, including area code, of agent for service)
John P. Guzman
Jessica Y. Chen
White & Case LLP
New York, New York 10020
Approximate date of commencement of proposed sale to the public: As soon as practicable after the effective date of this registration statement.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐ __________
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐ __________
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐__________
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933.
Emerging growth company ☒
If an emerging growth company that prepares its financial statements in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards† provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
† The term “new or revised financial accounting standard” refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
|CALCULATION OF REGISTRATION FEE|
|Title of Each Class of
Securities to be Registered
|Proposed Maximum Aggregate Offering Price (1)(2)||
|Common shares, par value US$ per share||US$||US$|
|(1)||Estimated solely for the purpose of computing the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.|
|(2)||Includes common shares to be sold by us and the selling shareholders and includes common shares to be sold upon the exercise of the underwriters’ option to purchase additional shares. See “Underwriting.”|
|(3)||Calculated pursuant to Rule 457(o) based on an estimate of the proposed maximum aggregate offering price.|
The information in this preliminary prospectus is not complete and may be changed. We and the selling shareholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED , 2020
(incorporated in the Cayman Islands)
This is an initial public offering of the common shares, US$ par value per share of Vitru Limited, or Vitru. Vitru is offering of the common shares to be sold in this offering. The selling shareholders identified in this prospectus are offering an additional common shares. We will not receive any proceeds from the sale of common shares by the selling shareholders. Prior to this offering, there has been no public market for our common shares. It is currently estimated that the initial public offering price per common share will be between US$ and US$ . We have applied to list our common shares on the New York Stock Exchange, or NYSE/Nasdaq Global Market, or Nasdaq, under the symbol “ .”
Following this offering, our existing shareholders, funds and accounts advised by The Carlyle Group, or Carlyle, funds and accounts advised by Vinci Partners, or Vinci Partners, and funds and accounts advised by Neuberger Berman, or the NB Funds, or, collectively, the Existing Shareholders, will beneficially own % of our outstanding share capital, assuming no exercise of the underwriters’ option to purchase additional shares referred to below.
We are an “emerging growth company” under the U.S. federal securities laws as that term is used in the Jumpstart Our Business Startups Act of 2012 and will be subject to reduced public company reporting requirements. Investing in our common shares involves risks. See “Risk Factors” beginning on page 23 of this prospectus.
|Initial public offering price||US$||US$|
|Underwriting discounts and commissions||US$||US$|
|Proceeds, before expenses, to us(1)||US$||US$|
|Proceeds, before expenses, to the selling shareholders(1)||US$||US$|
|(1)||See “Underwriting” for a description of all compensation payable to the underwriters.|
We and the selling shareholders have granted the underwriters an option for a period of 30 days from the date of this prospectus to purchase up to additional common shares at the initial public offering price, less underwriting discounts and commissions.
Neither the U.S. Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the common shares against payment in New York, New York on or about , 2020.
|Goldman Sachs & Co. LLC||BofA Securities||Itaú BBA||Morgan Stanley|
The date of this prospectus is , 2020.
table of contents
|Summary Financial and Other Information||19|
|Presentation of Financial and Other Information||59|
|Cautionary Statement Regarding Forward-Looking Statements||64|
|Use of Proceeds||66|
|Dividends and Dividend Policy||67|
|Selected Financial and Other Information||73|
|Management’s Discussion and Analysis of Financial Condition and Results of Operations||78|
|Principal and Selling Shareholders||158|
|Related Party Transactions||160|
|Description of Share Capital||161|
|Common Shares Eligible for Future Sale||176|
|Expenses of The Offering||190|
|Enforceability of Civil Liabilities||192|
|Where You Can Find More Information||194|
|Explanatory Note to The Financial Statements||195|
|Index to Financial Statements||F-1|
We and the selling shareholders have not authorized anyone to provide any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us or to which we may have referred you. We and the selling shareholders take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We, the selling shareholders and the underwriters have not authorized any other person to provide you with different or additional information. Neither we, the selling shareholders nor the underwriters are making an offer to sell the common shares in any jurisdiction where the offer or sale is not permitted. This offering is being made in the United States and elsewhere solely on the basis of the information contained in this prospectus. You should assume that the information appearing in this prospectus is accurate only as of the date on the front cover of this prospectus, regardless of the time of delivery of this prospectus or any sale of the common shares. Our business, financial condition, results of operations and prospects may have changed since the date on the front cover of this prospectus.
For investors outside the United States: Neither we, the selling shareholders, nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction, other than the United States, where action for that purpose is required. Persons outside the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating to, the offering of our common shares and the distribution of this prospectus outside the United States.
We own or have rights to trademarks, service marks and trade names that we use in connection with the operation of our business, including our corporate name, logos and website names. Other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners. Solely for convenience, some of the trademarks, service marks and trade names referred to in this prospectus are listed without the ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our trademarks, service marks and trade names.
Unless otherwise indicated or the context otherwise requires, all references in this prospectus to “Vitru” or the “Company,” “we,” “our,” “ours,” “us” or similar terms refer to Vitru Limited, together with its subsidiaries, following the contribution of Vitru Brazil (as defined below) shares to us.
All references to “hubs” refer to our distance learning centers.
All references to “Vitru Brazil” refer to Treviso Empreendimentos, Participações e Comércio S.A., our Brazilian principal operating subsidiary whose consolidated financial statements are included elsewhere in this prospectus.
The term “Brazil” refers to the Federative Republic of Brazil and the phrase “Brazilian government” refers to the federal government of Brazil. “Central Bank” refers to the Brazilian Central Bank (Banco Central do Brasil). References in the prospectus to “real,” “reais” or “R$” refer to the Brazilian real, the official currency of Brazil and references to “U.S. dollar,” “U.S. dollars” or “US$” refer to U.S. dollars, the official currency of the United States.
All references to the “Companies Law” are to the Cayman Islands’ Companies Law (2020 Revision) as the same may be amended from time to time, unless the context otherwise requires.
An investment in our common shares involves a high degree of risk. In addition to the other information in this prospectus, you should carefully consider the following risk factors in evaluating us and our business before purchasing our common shares. In particular, you should consider the risks related to an investment in companies operating in Brazil and Latin America generally, for which we have included information in these risk factors to the extent that information is publicly available. In general, investing in the securities of issuers whose operations are located in emerging market countries such as Brazil involves a higher degree of risk than investing in the securities of issuers whose operations are located in the United States or other more developed countries. If any of the risks discussed in this prospectus actually occur, alone or together with additional risks and uncertainties not currently known to us, or that we currently deem immaterial, our business, financial condition, results of operations and prospects may be materially adversely affected. If this were to occur, the value of our common shares may decline and you may lose all or part of your investment. When determining whether to invest, you should also refer to the other information contained in this prospectus, including our financial statements and the related notes thereto. You should also carefully review the cautionary statements referred to under “Cautionary Statement Regarding Forward-Looking Statements.” Our actual results could differ materially and adversely from those anticipated in this prospectus.
Certain Risks Relating to Our Business and Industry
We are subject to various federal laws and extensive government regulation, and changes in such laws and regulation could have a material adverse effect on our business and our growth strategy.
We are subject to various federal laws and extensive government regulations by the MEC, the National Education Council (Conselho Nacional de Educação), or the CNE, the INEP, and the National Postsecondary Education Assessment Commission (Comissão Nacional de Avaliação da Educação Superior), or CONAES.
The Brazilian government may review and change the laws and regulations to which we are subject at any time. In addition, the MEC may also promulgate additional rules and regulations applicable to postsecondary education institutions, particularly with respect to distance learning programs. Any significant changes to the regulatory framework within which we currently operate could have a material adverse effect on us, in particular changes relating to:
|·||any revocation of accreditation of private educational institutions;|
|·||the imposition of controls on monthly tuition payments or restrictions on profitability of private educational institutions;|
|·||academic requirements for courses and curricula, including bans on offering certain subjects in a distance learning format;|
|·||changes to the situations in which distance learning education is authorized, requirements to be met to open new distance learning educational hubs or in the accreditation requirements to operate distance learning educational hubs;|
|·||changes to the evaluation criteria of private educational institutions; and|
|·||infrastructure requirements applicable campuses and/or hubs, such as libraries, laboratories and administrative support.|
The postsecondary education sector is highly regulated, and our failure to comply with existing or future laws and regulations could have a material adverse effect on our business.
The offer of postsecondary education is subject to the prior issuance of an authorization by the MEC. The authorizing acts issued by the MEC for postsecondary education are: accreditation and re-accreditation,
authorization, recognition and renewal of recognition. Accreditation and re-accreditation refer to the educational institution; while authorization, recognition and renewal of recognition refer to the courses offered by the institution.
Brazilian education regulations define three types of postsecondary education institutions: (i) colleges; (ii) university centers; and (iii) universities. Each of these requires prior accreditation from the MEC to operate. Courses offered by colleges depend on prior authorizations from the MEC to be implemented, while courses offered by university centers and universities are not subject to such requirements, except for courses in law, medicine, psychology, nursing and dentistry, which do require the prior authorization from the MEC. For courses in law and medicine, prior to the authorization from the MEC, it is necessary to obtain formal opinion issued by Federal Council of the Brazilian Bar Association or the National Health Council, respectively.
In addition to the authorization, courses must be recognized by the MEC. Pursuant to article 101 of Ordinance No. 23/2017, issued by the MEC, courses may be considered valid even if the recognition request is not formally recognized by the MEC until the date that the first class has concluded the course and as long as the educational institution has filed a request for accreditation within the established legal deadline. Lastly, all postsecondary education institutions must be accredited by the MEC.
The MEC must authorize our campuses located outside our headquarters before they can start operating and providing programs. Any authorization to open new distance learning educational hubs is contingent on our Institutional Concept (Conceito Institucional), or CI. For further information, see “Regulatory Overview”. Distance learning programs, as well as on-campus learning programs, are also subject to strict accreditation requirements for their implementation and operation. We must comply with all such requirements in order to obtain and renew all authorizations.
We cannot assure you we will be able to comply with these regulations and maintain the validity of our authorizations, recognition and accreditations in the future. If we fail to comply with these regulatory requirements, the MEC could place limitations on our operations, including cancellation of programs, restrictions on the number of enrollments we offer to students, termination of our ability to issue degrees and certificates and revocation of our accreditation, any of which could adversely affect our reputation, financial condition and results of operations. We cannot assure you that we will obtain accreditation or re-accreditation of our postsecondary education institutions, or that our courses will receive authorization or recognition and renewal of recognition as scheduled, or that such courses will have all of the accreditations, re-accreditations, authorizations, recognition and renewal of recognition required by the MEC. The absence of such authorizations and recognitions or any delays in obtaining them could adversely affect our financial condition and results of operations. We may be materially adversely affected if we are unable to obtain authorizations, accreditations and course recognitions in a timely manner, if we cannot introduce new courses as quickly as our competitors or if we are not able to or do not comply with any new rules or regulations promulgated by the MEC.
If we are unable to enter into agreements and maintain good relationships with, and/or increase the number of, our hub partners, our business and growth may be adversely affected. Failure by our hub partners to comply with the terms of agreements with them, and any failure by us to enforce such terms, may also adversely affect us. In addition, failure by our hub partners to maintain their existing levels of profitability may result in them ceasing to view their relationships with us as advantageous.
We derive a significant portion of our revenue from partnerships with education centers. Our net revenue was R$461.1 million for the year ended December 31, 2019, most of which was derived from students who study in hubs managed by our hub partners. We enter into these partnerships through contracts with hub partners who provide centers with infrastructure for our students, which may include private schools, and to whom we provide teachers and materials, teaching methodologies, as well as pedagogical, administrative and marketing advice. Currently, 81.5% of our hubs are partner hubs. We typically enter into contracts with our hub partners for indefinite terms. In the event of termination, in order to minimize the impact of early termination of these contracts on our students, hub partners are required to carry out their obligations under the applicable contract until the end of the semester during which the termination of the contract is initiated.
We also rely in part on existing partner referrals to attract new hub partners. Accordingly, maintaining a good relationship with our hub partners and developing new relationships and expanding our network of hub partners are essential to the success of our business. As of December 31, 2019, we had 130 hub partners. Additionally, we may not be able to renew our contracts with our hub partners, including as a result of changes in the leadership
composition of our hub partners and their decisions to discontinue existing relationships with us. In addition, our hub partners are independent entities, and we cannot guarantee that our hub partners will be able to maintain their existing levels of profitability and, therefore, that they will continue to view their relationships with us as valuable. Our hub partners are remunerated by their respective share of the tuition fee collected by us from students, based on a given percentage which is similar across all our partnership agreements. This share is also deducted from tuition fees recognized by us as gross revenue. The percentage is higher in the beginning of the hubs’ operations and is reduced gradually as hubs mature. Therefore, we cannot assure you that our hub partners will continue to work with us if their profitability declines as the hubs mature. Any deterioration in our relationship with our hub partners, and any early termination of, or a failure to renew, our contracts with our hub partners (including as a result of our hub partners no longer viewing those relationships as advantageous, as a result of a decrease in their profitability or otherwise) may harm our image, impair our ability to pursue our growth strategy, and materially adversely affect our business, our operating and financial results and our cash flows. Given that our existing hub partners usually also open new hubs, any deterioration in our relationship with our hub partners, or any failure to renew such relationships, could also affect our ability to expand further.
Furthermore, we cannot guarantee that our hub partners will always comply with the terms of our agreements with them. Failure to abide by such terms may include breaches of obligations not to solicit students, misuse of our brand, creation of unsanctioned classes, default in payment obligations under the applicable agreements and other matters, which may result in the applications of fines and/or penalties and, in certain circumstances, trigger our right to terminate the agreement. We may not always be able to enforce our agreements with hub partners effectively or at all. Any such breaches of agreements by our hub partners, and any failure on our part to enforce such agreements, may result in negative publicity, tarnish our reputation, deter prospective students from enrolling in our courses and deter prospective hub partners from entering into relationships with us, which may have a material adverse effect on our reputation as well as on our business, financial condition and results of operations.
If we are not able to attract and retain students, or are unable to do so without decreasing our tuition fees or increasing tuition discounts, our revenues may decline. Any increase in the drop-out rates of students in our education programs may adversely affect our results of operations.
The success of our business depends primarily on the number of students enrolled in our programs and the tuition fees that they pay. Our ability to attract and retain students depends mainly on the tuition fees we charge, the convenience of the locations of our facilities, the infrastructure of our hubs and campuses, the quality of our programs as perceived by our existing and potential students and our sales and marketing strategies. These factors are affected by, among other things, our ability to (i) respond to increasing competitive pressures, (ii) develop our educational systems to address changing market trends and demands from schools and students, (iii) develop new programs and enhance existing programs to respond to changes in market trends and student demands, (iv) adequately prepare our students for careers in their chosen professional occupations, (v) successfully implement our expansion strategy, (vi) manage our growth while maintaining our teaching quality and (vii) effectively market our programs to a broader base of prospective students. If we are unable to continue to attract new students to enroll in our programs and to retain our current students without significantly decreasing tuition or increasing tuition discounts, our revenues and our business may decline and we may be adversely affected.
We believe that our drop-out rates are primarily related to the personal motivation and financial situation of our current and potential students, as well as to socioeconomic conditions in Brazil. Significant changes in projected drop-out rates and/or failure to re-enroll students once the semester is over may affect our enrollment numbers, as well as our ability to recruit and enroll new students, each of which may have a material adverse effect on our projected revenues and our results of operations.
An increase in delays and/or defaults in the payment of tuition fees, as well as students canceling their course registration, may adversely affect our income and cash flow.
We depend on the full and timely payment of the tuition we charge our students, including tuition payments we receive through Student Financing Program (Programa de Financiamento Estudantil), or FIES, the University Scholarships Program of the State of Santa Catarina (Programa de Bolsas Universitárias de Santa Catarina), or UNIEDU, and other funded scholarships. An increase in payment delinquency or default by our students, or an increase in the proportion of students canceling their course registration, may have a material adverse effect on our cash flows and our business, including our ability to meet our obligations. Student delays and/or defaults in the payment of tuition fees and student cancellations of their course registrations may occur for a variety of reasons over
which we have no control, including a student’s personal, financial and academic situation. Any increase in payment delinquency or default by our students, or an increase in the proportion of students canceling their course registration may have a material adverse effect on us.
Changes in tax laws, tax incentives, benefits or differing interpretations of tax laws may harm our results of operations.
Changes in tax laws, regulations, related legal interpretations applicable to our activities and accounting standards in Brazil may result in a higher tax rate on our earnings, which may significantly reduce our profits and cash flows from operations. In addition, our results of operations and financial condition may decline if certain tax incentives are not retained or renewed. If the taxes applicable to our business increase or any tax benefits are revoked and we cannot alter our cost structure to pass our tax increases on to customers, our financial condition, results of operations and cash flows could be seriously harmed. Our distance learning activities are also subject to a Municipal Tax on Services (Imposto Sobre Serviços), or ISS. Any increases in ISS rates or differing legal interpretations applicable to our activities would also harm our profitability.
In addition, tax rules in Brazil, particularly at the local level, change regularly, and it is common for taxpayers to challenge such changes, which may result in additional tax assessments and penalties for our company.
We are involved in tax proceedings based on differences of interpretation between us and the Brazilian tax authorities regarding tax laws and regulations. For further information, see “Business—Legal Proceedings—Tax and Social Security Matters.”
Any changes in tax laws, incentives, benefits or in the interpretation of tax laws, or decisions adverse to us in tax proceedings could have a material adverse effect on our business, financial condition and our results of operations.
Any change or review of the tax treatment of our activities, or the loss or reduction in federal tax exemptions provided under the PROUNI program, may materially adversely affect our business, financial condition and results of operations.
If the Brazilian government or any Brazilian municipality or tax authority decides to change or review the tax treatment of our activities, including tax exemptions available to us as a result of our participation in certain governmental programs relating to education, and we are unable to pass on any cost increase to our hub partners and/or to our students, our business, financial condition, as well as our results of operations may be materially adversely affected.
In particular, some of our students participate in the University for All Program (Programa Universidade para Todos), or the PROUNI program. PROUNI was created in 2005, through Law No. 11,096, of January 13, 2005. Its purpose is to provide full and partial scholarships to low-income students in undergraduate courses and sequential courses (cursos sequenciais), in private educational institutions. In return, the Brazilian federal government offers tax exemptions to educational institutions that participate in PROUNI. Private institutions may join PROUNI by executing a “commitment term,” with a 10-year term (renewable for another 10 years), setting the number of scholarships to be offered in each program, campus and course. Through the PROUNI program, the Brazilian federal government grants a number of full and partial scholarships to low-income postsecondary education students. As a result of our participation in the PROUNI program, we benefit from certain federal tax exemptions relating to bachelor’s and associate’s degree programs, such as (i) income tax, (ii) Social Contribution Tax on Gross Revenue (Programa de Integração Social), or PIS; (iii) Social Security Financing Tax on Gross Revenue (Contribuição para o Financiamento da Seguridade Social), or COFINS; and (iv) Social Contribution Tax on Net Profit (Contribuição Social sobre o Lucro Líquido), or CSLL, regarding our revenues from undergraduate and associate programs.
We may be disqualified from the PROUNI program and lose our tax exemptions if we do not comply with certain requirements, such as providing total or partial scholarships for a percentage of students who paid their tuition in the previous year, granting partial scholarships, submitting to the MEC semi-annual records of attendance, achievement and drop-out of students receiving scholarships, among others. For further information, see “Regulatory Overview.” If we lose our tax exemptions or are unable to comply with other, more stringent
requirements that may be introduced in the future, our business, financial condition and results of operations could be materially adversely affected.
There is a risk that additional changes in tax laws may prohibit, interrupt or modify the use of existing tax exemptions, and we cannot assure you that we will fully maintain such tax and other benefits related to PROUNI in the event the tax laws are amended further. Any suspension, accelerated default, repayment or inability to renew our tax exemptions may have an adverse effect on our results of operations. If we lose our tax exemptions and incentives, if we are unable to comply with future requirements or if changes in the law limit our ability to maintain these tax benefits, our business, financial condition, as well as the results of our operations may be significantly and adversely affected.
Starting in 2020, we expect to benefit from tax Law No. 10,865/04, as amended by Law No. 11,033/04, which currently establishes a zero rate for PIS and COFINS on the sale of books. The sale of books is currently also exempt by the Brazilian constitution from Brazilian municipal taxes, Brazilian services tax (Imposto Sobre Serviços), or ISS, and from the Brazilian tax on the circulation of goods, interstate and intercity transportation and communication services (Imposto sobre Operações relativas à Circulação de Mercadorias e sobre Prestações de Serviços de Transporte Interestadual e Intermunicipal e de Comunicação), or ICMS. If the Brazilian tax authorities decide to reduce the scope or discontinue this tax exemption, the resulting increase in the tax rate applicable to sales of books may adversely impact our business and results of operations.
We face significant competition in each program we offer and each geographic region in which we operate. If we fail to compete effectively, we may lose market share and our profitability may be adversely affected.
Our competitors may offer programs or courses similar to or better than those offered by us, have access to more funds, be more prestigious or well-regarded within the academic community, have more conveniently located hubs with better infrastructure or charge lower tuition (or no tuition, in the case of public institutions). To compete effectively, we may be required to reduce our tuition or increase our operating expenses in order to retain or attract students or to pursue new market opportunities. As a result, our revenues and profitability may decrease. We cannot assure you that we will be able to compete successfully against our current or future competitors.
We compete with various public and private postsecondary education institutions, some of which are nonprofit organizations and exempt from various taxes. Additionally, we may become subject to greater competition in the distance learning segment due to the implementation of Decree No. 9,057/2017 and MEC Ordinance No. 11/2017, which now permits the accreditation of postsecondary education institutions exclusively for distance learning in lato sensu undergraduate and postgraduate courses. If we are unable to maintain our competitive position or otherwise respond to competitive pressures effectively, we may lose our market share, our profits may decrease and we may be adversely affected.
Our success depends on our ability to monitor and adapt to technological changes in the education sector and maintain a technological infrastructure that works adequately and without interruption.
Information technology is an essential factor of our growth, especially in the distance learning business line. Our information technology systems and tools may become obsolete or insufficient, or we may have difficulties in following and adapting to technological changes in the education sector. Moreover, our competitors may introduce better products or service platforms. Our success, and especially the success of our distance learning business, depends heavily on our ability to efficiently improve our current products while developing and introducing new products that are accepted in the marketplace.
Additionally, a failure to upgrade our technology, features, content, security infrastructure, network infrastructure, or other infrastructure associated with our platform could harm our business. Adverse consequences could include disruptions, slower response times, bugs, degradation in levels of customer support, impaired quality of users’ experiences of our educational platform and delays in reporting accurate financial information.
Furthermore, broad changes in culture, habits and customs in consumer populations and the work environment, with respect to both economic and technological factors, may also affect the attractiveness and registration rates of our courses with our target market.
Our business, particularly our distance learning business line, depends on our information technology infrastructure functioning properly and without interruptions. Several problems regarding our information
technology structure, such as viruses, hackers, system interruptions and technical difficulties regarding our satellite transmissions of data, sound and image may have a material adverse effect on us and our business.
In addition, we face risks associated with unauthorized access to our systems, including by hackers and due to failures of our electronic security measures. These unauthorized entries into our systems can result in the theft of proprietary or sensitive information or cause interruptions in the operation of our systems. As a result, we may be forced to incur considerable expenses to protect our systems from electronic security breaches and to mitigate our exposure to technological problems and interruptions. Furthermore, our insurance coverage may not be sufficient to cover any damage we may suffer as a result of unauthorized access to our systems and other cybersecurity risks (see also “—We are not insured against all of the risks to which our business is exposed, and the insurance coverage we have may be inadequate to cover all losses and/or liabilities that we may incur in the course of our operations”).
Due to the recent developments regarding the Covid-19 outbreak, the president of Brazil has issued Provisional Measure No. 959/2020, which postponed the effectiveness of the Brazilian General Data Protection Law (Lei Geral de Proteção de Dados), or GDP Law. This provisional measure is effective for 60 days, extendable for an additional period of a single equal term. The Brazilian Congress has to vote to turn this provisional measure into an ordinary law and, if so, the GDP Law will come into force on May 3, 2021.
When the GDP Law comes into force, any failure by us or our subsidiaries to comply with the provisions of the GDP Law may expose us to penalties. See “—Failure to comply with data privacy regulations could result in reputational damage to our brands and adversely affect our business, financial condition and results of operations.”
Difficulties in identifying, opening and efficiently managing new hubs (whether operated by us or by third parties) and/or campuses on a timely basis as part of our organic growth strategy may adversely affect our business.
Our strategy includes expanding organically by opening new hubs (whether operated by us or third parties) and campuses and integrating them into our educational network. This growth plan creates significant challenges in terms of maintaining our teaching quality and culture, as a result of the complexity and difficulty of effectively managing a large number of hubs, campuses and programs. If we are unable to maintain our current quality standards, we may lose market share and be adversely affected.
Establishing new hubs and campuses poses important challenges and requires us to make significant investments in infrastructure, marketing, personnel and other preoperational expenses, mainly identifying if the city or location is economically sustainable for the opening of a new hub and/or a campus, identifying new hub partners and sites for lease, as well as identifying potential new partners where applicable. We prioritize identifying strategic sites, negotiating the lease of properties, building or refurbishing facilities (including libraries, laboratories, study rooms and classrooms), obtaining local permits, hiring and training faculty and staff and investing in administration and support.
If we do not succeed in identifying and establishing our hubs in a cost-effective manner, or if the MEC imposes conditions for the opening and operating of new hubs, our business may be adversely affected.
We may not be able to successfully expand our presence and performance in the distance learning segment.
We may face difficulties in successfully operating our distance learning program and in implementing and investing in the technologies necessary to operate a successful distance learning program, where the technological needs, the expectations of our customers and market standards change rapidly. We have to quickly modify our products and services to adapt to new distance learning technologies, practices and standards. We may be adversely affected if current or future competitors introduce products or service platforms that are superior to those we offer, or if our resources are not adequate to develop and adapt our technological capabilities rapidly enough to maintain our competitive position.
In addition, the success of our distance learning programs depends on the general population having easy and affordable access to the internet, as well as on other technological factors that are outside of our control. If the internet becomes inaccessible or access costs increase to levels higher than current prices, or if the number of students interested in distance learning educational methods does not increase, we may be unable to successfully implement our distance learning program strategy, which would have an adverse effect on our growth strategy.
We may not be able to update, improve or offer the content of our existing programs to our students on a cost-effective basis.
To differentiate ourselves and remain competitive, we must continually update our courses and develop new educational programs, including through the adoption of new technological tools. Updates to our current courses and
the development of new educational programs may not be readily accepted by our students or by the market. Also, we may not be able to introduce new educational programs at the same pace as our competitors or at the pace required by the labor market. If we do not adequately modify our educational programs in response to market demand, whether due to financial restrictions, unusual technological changes or otherwise, our ability to attract and retain students may be impaired and we may be materially adversely affected. Any such developments may have a material adverse effect on us.
We may face difficulties in effectively integrating and managing a growing number of hubs.
Our number of hubs has grown exponentially, from 72 in 2016 to 545 in 2019. We may face significant challenges in the process of integrating the operations of any new hubs with our existing hubs, such as the inability to manage a greater number of geographically dispersed employees and create and implement efficient uniform controls, procedures and policies, in addition to the incurrence of high integration costs. The anticipated benefits of the expansion we may pursue will not be achieved unless we successfully integrate the new hubs into our operations and effectively manage, market and apply our business strategy to them. We may also be unable to integrate faculty and personnel with different professional experience and from different corporate cultures, and our relationship with current and new employees, including tutors and professors, may be impaired. In addition, we may face challenges in entering into successful collective bargaining arrangements with unions due to differences in the negotiation procedures followed in the different geographic regions of the new hubs. See “—We could be adversely affected by the terms and conditions of collective bargaining agreements with the labor unions representing our tutors and professors and administrative employees or by strikes and other union activity.” If we are not able to manage our growth effectively, our business could be materially adversely affected.
Material weaknesses in our internal control over financial reporting have been identified, and if we fail to establish and maintain proper and effective internal controls over financial reporting, our results of operations and our ability to operate our business may be harmed.
Prior to this offering, we were a private company with limited accounting personnel and other resources to address our internal control over financial reporting and procedures. Our management has not completed an assessment of the effectiveness of our internal control over financial reporting and our independent registered public accounting firm has not conducted an audit of our internal control over financial reporting.
After this offering, we will be subject to the Sarbanes-Oxley Act, which requires, among other things, that we establish and maintain effective internal controls over financial reporting and disclosure controls and procedures. Under the current rules of the SEC, starting with our second annual report following our initial public offering we will be required to perform system and process evaluation and testing of our internal controls over financial reporting to allow management to assess the effectiveness of our internal controls. Our testing may reveal deficiencies in our internal controls that are deemed to be material weaknesses or significant deficiencies and render our internal controls over financial reporting ineffective. We cannot provide an estimate of the time required or costs expected to be incurred in connection with implementing a remediation plan. Remediation measures may be time consuming, costly, and might place significant demands on our financial and operational resources. If we are not able to comply with these requirements in a timely manner, or if we or our management identifies material weaknesses or significant deficiencies in our internal controls over financial reporting that are deemed to be material weaknesses, the market price of our common shares may decline and we may be subject to investigations or sanctions by the SEC, the Financial Industry Regulatory Authority, Inc., or FINRA, or other regulatory authorities.
In addition, these new obligations will also require substantial attention from our senior management and could divert their attention away from the day-to-day management of our business. These cost increases and the diversion of management’s attention could materially and adversely affect our business, our financial condition and our results of operations.
In connection with the audit of our consolidated financial statements, we identified material weaknesses in our internal control over financial reporting as of December 31, 2019, which are described below. A material weakness is a deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the annual or interim consolidated financial statements will not be prevented or detected on a timely basis. The material weaknesses identified relate to our insufficient accounting resources and processes necessary to comply with the reporting and compliance requirements of IFRS and the SEC. As a result, this contributed to the following material weaknesses, specifically, we did not design and
maintain effective controls over: (a) supervision in relation to financial reporting for a public company, including lack of an audit committee; (b) segregation of duties across business processes; (c) training, specifically, training addressing financial reporting topics for a public company; (d) the accounting for stock-based compensation; (e) the accounting for goodwill, specifically the allocation of goodwill and impairment testing; (f) the financial reporting closing process, including the accounts payable from acquisition of subsidiaries, the identification and disclosure of related party transactions, revenue recognition and the procedures existent to maintain formal accounting policies, processes and controls to analyze, account for and disclose complex transactions; and (g) information systems and associated infrastructure, including but not limited to (1) managing access to our systems, data and end-user computing (EUC) controls, and (2) computer operations controls.
These material weaknesses did not result in a misstatement to our consolidated financial statements included herein. However, each of the material weaknesses described above could have resulted in a misstatement of one or more account balances or disclosures that would result in a material misstatement to the annual or interim consolidated financial statements that would not be prevented or detected, and, accordingly, we determined that these control deficiencies constitute material weaknesses.
We are in the process of adopting a remediation plan to improve our internal control over financial reporting, including increasing the depth and experience within our accounting and finance team, designing and implementing improved processes and internal controls, including the implementation of an audit committee, and retaining outside consultants with extensive technical expertise. However, we cannot assure you that our efforts will be effective or prevent any future material weakness or significant deficiency in our internal control over financial reporting.
Our business is subject to seasonal fluctuations, which may cause our operating results to fluctuate from quarter-to-quarter and adversely impact our working capital and liquidity throughout the year, adversely affecting our business, financial condition and results of operations.
Our revenues, expenses and, consequently, our operating results normally fluctuate as a result of seasonal variations in our business. Specifically:
|·||Our distance learning undergraduate courses are structured around separate monthly modules. This enables students to enroll in distance learning courses at any time during a semester. Despite this flexibility, we generally experience a higher number of enrollments in distance learning courses in the first and third quarters of each year. These periods coincide with the beginning of academic semesters in Brazil. Furthermore, we generally experience a higher number of enrollments at the beginning of the first semester of each year than at the beginning of the second semester of each year. The seasonality in enrollments has a direct impact on our revenues. We generally record higher revenue in the second and fourth quarters of each year as the impact of discounts to incoming students is lower and dropout rates are also lower. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Revenue Recognition and Seasonality.”|
|·||A significant portion of our expenses are also seasonal. Due to the nature of our business cycle, a significant amount of selling and marketing expenses are required to cover costs in connection with the first semester intake, which in Brazil is typically in December, January and February.|
As a result, we expect quarterly fluctuations in our revenues and operating results to continue. These fluctuations could result in volatility and adversely affect our performance, liquidity and cash flows. As our business grows, these seasonal fluctuations may become more pronounced. As a result, we believe that sequential quarterly comparisons of our financial results may not provide an accurate assessment of our results of operations.
The Covid-19 outbreak may cause an adverse effect in our operations, including the partial closure of our business. The extension of the Covid-19 pandemic, the perception of its effects, or the way in which such pandemic will impact our business, either on a microeconomic or on a macroeconomic level, are subject to uncertain and unforeseeable future developments, which may have a material adverse effect on our business, financial condition, operating results and cash flow.
Covid-19 is an infectious disease caused by severe acute respiratory syndrome coronavirus 2 (SARS-CoV-2). The disease was first identified in 2019 in Wuhan, the capital of Hubei province in central China, and has since spread globally. On March 11, 2020, the World Health Organization revised the classification of Covid-19 from an epidemic (when a disease spreads through a specific community or region) to a pandemic, which according to the World Health Organization’s definition is when there is a worldwide spread of a new disease. By that time, Covid-19 had already reached Brazil. On March 20, 2020 the Brazilian federal government declared a national emergency with respect to Covid-19. The classification of the disease as a pandemic was motivated by the rapid increase in the number of cases and the number of affected countries on all continents, triggering measures by governments, companies and societies to contain the advances of Covid-19. The measures vary from country to country in quantity and degree of severity but basically involve: (1) recommendations to adopt voluntary isolation (avoid going out on the streets, avoiding crowds, avoiding physical contact with other people, etc.); (2) internal restrictions regarding the movement of people; (3) closing of schools; (4) closing of public places (parks and leisure centers); (5) closures of shopping malls, bars and restaurants; (6) adoption of remote working practices (home office) by companies, whenever possible and permitted by their activities; (7) closing borders between countries; (8) restriction and/or suspension of trade in non-essential goods and services in the context of Covid-19 (while supermarkets, drugstores, gas stations and other essential services remain available); (9) purchase restrictions for certain essential items to avoid scarcity; (10) interruption of production activities of consumer items not essential to combat the pandemic; (11) restriction on the delivery of products to homes other than essentials; (12) compulsory reduction of working hours; (13) cancellation of public events; and (14) other restrictive measures.
Such events have adversely impacted the global economy as well as national and regional economies (including the Brazilian economy), and have caused disruption of regional or global economic activity. In particular and in the interest of public health and safety, state and local governments in Brazil have required mandatory school closures until June 15, 2020, which has resulted in the closure of our on-campus learning facilities and hubs. The Covid-19 pandemic is still evolving in Brazil, and authorities may maintain the school closures for a longer or undefined extended of period of time, impose a more severe lockdown, among other measures, all of which are outside of our control and may adversely affect our business, financial condition, operating results and cash flow. The Covid-19 pandemic is expected to cause a material and adverse effect on the general economic, financial, political, demographic and business conditions in Brazil, which may reduce the disposable income of our students and their families, and consequently (1) result in an adverse impact on the ability of our students (current and/or prospective) to pay our tuition fees and/or (2) trigger an increase in our attrition rates.
We cannot predict the extent of the pandemic, and consequently, its direct and indirect impacts on local and world economies in the short, medium and long terms. In a prolonged contraction scenario, the virus could spread globally without a seasonal decline and the impacts could include: (1) increased number of deaths; (2) demand shock; (3) overloading healthcare systems in many countries, especially in less developed areas; (4) large-scale human and economic impact; (5) layoffs and bankruptcies in the most affected sectors rising sharply throughout 2020; (6) severe global economic impact, with significant gross domestic product contraction in most major economies in 2020 and a slow-moving recovery; (7) infrastructure collapse and lack of basic services, particularly in less developed countries; and (8) compromised government planning, coordination and reaction capacity according to the speed that the disease progresses.
Despite the measures adopted to contain the progress of Covid-19 and aid measures announced by governments around the world, including the Brazilian government, as of the date hereof, we cannot predict the extent, duration and impacts of such containment measures, or the results of aid measures in Brazil. Accordingly, we cannot predict the direct and indirect effects of the Covid-19 pandemic and governments’ responses to it on our business, results of operations and financial condition, including: (1) the impact of Covid-19 on our financial condition and results of operations, including trends and the overall economic outlook, capital, investments and financial resources or liquidity position; (2) how future operations could be impacted; (3) the impact on our costs or access to capital and funding resources; (4) if we could incur any material Covid-19-related contingencies; (5) how Covid-19 could affect assets on our balance sheet and our ability to timely record those assets; (6) the anticipation of any material impairments, increases in allowances for credit losses, restructuring charges or other expenses; (7) any changes in accounting judgements that have had or are reasonably likely to have a material impact on our financial statements; (8) the decline in demand for our products; (9) the impact on our materials production chain; (10) the impact on the relationship between costs and revenues; (11) general economic and social uncertainty, including increases in interest rates, variations in foreign exchange rates, inflation and unemployment; and (12) other unforeseen impacts and consequences.
In addition, Covid-19 poses risks that our employees, contractors, suppliers, students, hub partners and other business partners may be prevented from conducting business activities for an indefinite period of time, including shutdowns that may be requested or mandated by governmental authorities and could have a material adverse effect on our results of operations, financial condition and liquidity. The extent to which Covid-19 impacts our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of Covid-19 and the actions to contain Covid-19 or treat its impact, among others.
We are not aware of comparable events that could provide us with guidance as to the effect of the spread of the Covid-19 pandemic and, as a result, the final impact of the Covid-19 outbreak is highly uncertain. Further, these adverse events occurred after the issuance of our audited consolidated financial statements included elsewhere in this prospectus. As of the date hereof, there is no additional information available to enable us to carry out an assessment of the impacts of the Covid-19 pandemic on our business, other than the considerations presented herein and in this prospectus under the sections “Summary—Recent Events” and “Risk Factors—Certain Risks Relating to Our Business and Industry—Public health threats or outbreaks of communicable diseases could have an adverse effect on our operations and financial results.” Although as of the date of this prospectus there has been no material impact on our operations, as most of our services are already delivered remotely or capable of being delivered remotely, we are not able to assure you if, and to what extent, in the future, our operations will be impacted by Covid-19.
Furthermore, to the extent the Covid-19 pandemic adversely affects our business, results of operations, financial condition and liquidity, it may also have the effect of heightening many of the other risks described in this “Risk Factors” section.
Public health threats or outbreaks of communicable diseases could have an adverse effect on our operations and financial results.
We may face risks related to public health threats or outbreaks of communicable diseases. The outbreak of communicable diseases could result in a widespread health crisis that could adversely affect the global economy and our ability and our business partners’ ability to conduct business in Brazil for an indefinite period of time. For example, the recent outbreak in China of Covid-19 has spread across the globe, and is already resulting in a global or regional economic slowdown, a shutdown of production and supply chains and a disruption of international trade, all of which may negatively impact the postsecondary education industry.
For example, disruptions in public and private infrastructure, including communications and financial, could materially and adversely disrupt our normal business operations. We have transitioned a significant subset of our employee population to a remote work environment in an effort to mitigate the spread of Covid-19, which may exacerbate certain risks to our business, including an increased demand for information technology resources, increased risk of phishing and other cybersecurity attacks, and increased risk of unauthorized dissemination of sensitive personal information or proprietary or confidential information about us, our hub partners, our students or other third-parties. See “—Failure to prevent or detect a malicious cyberattack on our systems and databases could result in a misappropriation of confidential information or access to highly sensitive information.”
Economic, health, political and environmental crises or any other type of crisis capable of impacting the Brazilian economy may affect the purchasing power of the population, which may result in a decrease in the number of our students and/or an increase in payment delinquency.
Economic, health, political and environmental crises or any other type of crisis capable of impacting the Brazilian economy may affect the purchasing power of the population, which, may result in a decrease in the number of products and services we sell, as well as in an increase in payment delinquency or default by our students, or an increase in the proportion of students canceling their course registration.
The market value of securities of Brazilian issuers is affected to varying degrees by economic and market conditions in other countries, including developed countries such as the United States and certain European and emerging market countries. Investors’ reactions to developments in these countries may adversely affect the market value of securities of Brazilian issuers, including our common shares. Trading prices on the B3, for example, have been historically affected by fluctuation in interest rates applicable in the United States and variation in the main U.S. stock indices. Any increase in interest rates in other countries, especially the United States, may decrease global liquidity and the interest of investors in the Brazilian capital markets, adversely affecting our common shares. Moreover, crises or significant developments in other countries and capital markets may diminish investors’ interest in securities of Brazilian issuers, including our common shares, and their trading price, limiting or preventing our access to capital markets and to funds to finance our future operations at acceptable terms. The financial crisis that originated in the United States in the third quarter of 2008, for example, resulted in the appreciation of the U.S. dollar against the real, the restriction of credit in the domestic market, an increase in unemployment rates, an increase in credit defaults and, consequently, a reduction of consumption in Brazil. Likewise, the political-economic crisis experienced in the country between 2015 and 2016 had a material impact on unemployment rates, reducing the population’s purchasing power and, consequently, general consumption in the country.
Recently, the world has been affected by the Covid-19 pandemic that has caused negative global economic impacts, of which we have not yet been able to quantify. As result of the pandemic, it is believed that the purchasing power of the Brazilian population will decrease, which could cause a significant reduction in the number of our students or, at least, materially decrease the number of our perspective students, as well as in an increase in payment delinquency or default by our students, or an increase in the proportion of students canceling their course registration. This impact may negatively affect our business, our operating and financial results and our cash flows.
Our working capital needs have increased, and may continue to increase for the near future.
We have historically relied on our cash flow generation to satisfy our working capital needs. If we do not increase our cash flow generation or gain access to additional capital, whether through a line or credit or other sources of capital, which may not be available on satisfactory terms or in adequate amounts, then our cash and cash equivalents may decline, which will have an adverse impact upon our liquidity and capital resources. We expect our working capital needs to increase as our business expands. If we do not have sufficient working capital, we may not be able to pursue our growth strategy, respond to competitive pressures or fund key strategic initiatives, which may harm our business, financial condition and results of operations.
If we lose key personnel our business, financial condition and results of operations may be adversely affected.
We are dependent upon the ability and experience of a number of our key personnel who have substantial experience with our operations. Many of our key personnel have worked for us for a significant amount of time or were recruited by us specifically due to their industry experience. It is possible that the loss of the services of one or a combination of our senior executives or key managers could have a material adverse effect on our business, financial condition and results of operations. We do not currently carry any key man insurance against such risks.
Furthermore, although we have entered into noncompetition agreements with our key personnel, they may nevertheless go work for our competitors, or create new competing businesses, after leaving us if we are unable to enforce such noncompetition agreements for any reason. Any such departure by key personnel may adversely affect us.
Increases in the price of certain inputs and in the fees of our third-party printer providers may result in an increase in our costs, which we may not be able to pass on to our students by adjusting our monthly tuition fees.
Our primary source of income is the monthly tuition payments we charge to our students. For the year ended December 31, 2019, payroll and social charge expenses represented 48.6%, sales and marketing represented 12.4%, materials represented 4.1%, lease payments represented 0.9% and utilities, cleaning and security costs represented 1.6% of our total costs and expenses. Personnel costs, lease values and the cost of electricity are adjusted regularly using indices that reflect changes in inflation levels. In addition increases in the price of the inputs used for editing and publishing the printed materials related to our educational platform, particularly the price of paper, the cost of printing services and publishing, as well as increases in the fees of our third party printer providers, which produce our printed educational materials, could adversely affect our results if we are not able to fully pass these cost increases on to our students.
Paper and postage prices are particularly difficult to predict and control. Paper is a commodity and its price may be impacted by fluctuations in foreign exchange rates and commodities prices, and can be subject to significant volatility. Our third-party printer providers have adjusted their fees to account for changes in prevailing market prices of their inputs, especially paper. Though we have historically been able to obtain favorable pricing through volume discounts, particularly as a result of our significant recent growth, no assurance can be provided that we will be able to continue to obtain favorable printing and publishing pricing. We cannot predict with certainty the magnitude of future price changes for paper, postage, and printing and publishing in general.
The tuition fees charged by our competitors, and the contractual arrangements and Brazilian legislation to which we are subject, may prevent us from passing on cost increases to our students by adjusting our monthly fees in a timely manner. If we are not able to transfer any increases in our costs to students by increasing the amounts of their monthly tuition fees, our operating results may be adversely affected.
We are subject to supervision by the MEC and, consequently, we may suffer sanctions as a result of noncompliance with any regulatory requirements.
Brazilian Federal Law No. 10,861/2004, regulated by Decree No. 9,235/2017, implemented the activities of supervision of postsecondary education entities and courses in the Brazilian federal education system. The Secretariat for Regulation and Supervision of Postsecondary Education (Secretaria de Regulação e Supervisão da Educação Superior), or SERES, of the MEC is responsible for the regular and special supervision of the corresponding courses and programs.
Regular supervision derives from complaints and allegations by students, parents and faculty members, as well as by public entities and the press. These complaints and allegations involve specific cases of entities with courses showing evidence of irregularities or deficiencies. We are subject to those complaints and representations. Special supervision, on the other hand, may be commenced by the MEC itself, based on its postsecondary education regularity and quality standards, and involves more than one course or entity, grouped according to the criteria chosen for the special supervision. These criteria may include unsatisfactory results in the National Exam for the Assessment of Student Performance (Exame Nacional de Desempenho de Estudantes), or ENADE, and the Difference Indicator between Expected and Actual Performance (Indicador de Diferença entre os Desempenhos Observado e Esperado), among other quality indicators, the history of course evaluations by the INEP, as well as compliance with specific legal requirements such as, for example, the minimum ratio between faculty members with master’s and doctorate degrees.
Administrative irregularities can include, among others: (i) unlicensed or irregular postsecondary courses; (ii) any outsourcing of postsecondary education activities; (iii) the failure to file a re-accreditation or recognition or renewal request with respect to postsecondary education courses within the time periods enacted by the MEC pursuant to Decree No. 9,235/2017; (iv) failure to comply with any penalties imposed by the MEC; and (v) failure to comply with educational legislation when offering postsecondary education courses.
If the MEC concludes, as part of its supervisory activities, that an irregularity constitutes an imminent risk or threat to students or the public interest, it may impose the following measures on the relevant educational institution for a period to be determined by the SERES: (i) suspend the admission of new students; (ii) suspend the offering of undergraduate or postgraduate lato sensu courses; (iii) suspend the institution’s discretionary ability to, among other things, create new postsecondary courses and establish course curricula, if applicable; (iv) suspend the license to establish new distance learning programs; (v) override any ongoing regulatory requests filed by the institution and prohibit new regulatory requests; (vi) suspend participation in the New FIES; (vii) suspend participation in PROUNI; and (viii) suspend or restrict participation in other federal education programs. The educational institution can contest the MEC’s findings by filing motions with the MEC or with Brazilian courts.
Upon completion of the supervisory process and to the extent the MEC concludes that there are administrative irregularities, SERES may apply the penalties provided for by Law No. 9,394/1996, namely (i) discontinue courses; (ii) directly intervene in the educational institution; (iii) temporarily suspend the institution’s discretionary ability to, among other things, create new postsecondary courses and establish course curricula, if applicable; (iv) disqualify the institution as an educational institution; (v) reduce the number of student vacancies; or (vi) temporarily suspend new student enrollments.
We are also subject to regulation by UNIEDU, a program of the state of Santa Catarina that provides scholarships for students to attend universities. If we do not comply with such regulations, we may be disqualified and stop receiving funding for corresponding programs, which may adversely affect our business, results of operations and financial condition.
We could be adversely affected by the terms and conditions of collective bargaining agreements with the labor unions representing our tutors and professors and administrative employees or by strikes and other union activity.
Our payroll and social charge expenses account for the majority of our total costs and expenses, or 48.6% of such costs and expenses for the year ended December 31, 2019. Our faculty and administrative employees are represented by labor unions with a strong representation in the higher education sector and are covered by collective bargaining agreements or similar arrangements negotiated by associations representing employers and labor unions representing employees. Such collective bargaining agreements determine the length of the school day, the length of
the school year, minimum compensation, raises for cost-of-living, vacations and fringe benefits, among other terms. These agreements are subject to annual renegotiation and may be so modified. We are not members of an association representing employers and we do not therefore participate in collective bargaining agreements negotiations. Typically, inflation rates have been used as a reference for annual wage increases; however, certain collective bargaining agreements may also provide for adjustments in excess of inflation for our faculty and administrative employees. We could also be adversely affected if we fail to achieve and maintain cooperative relationships with our tutors, professors’ or administrative employees’ unions or face strikes, stoppages or other labor disruptions by our tutors, professors or employees.
In addition, we may not be able to pass on any increase in costs arising from the renegotiation of collective bargaining agreements to the monthly tuition fees paid by students, which may have a material adverse effect on our business.
We operate in markets that are dependent on Information Technology (IT) systems and technological change. Failure to maintain and support customer-facing services, systems, and platforms, including addressing quality issues and execution on time of new products and enhancements, could negatively impact our revenues and reputation.
We use complex IT systems and products to support our businesses activities, including customer-facing systems, back-office processing and infrastructure. We face several technological risks associated with online product service delivery, information technology security (including virus and cyber-attacks), e-commerce and enterprise resource planning system implementation and upgrades. Our plans and procedures to reduce risks of attacks on our system by unauthorized parties may not be successful. Thus, our businesses could be adversely affected if our systems and infrastructure experience a failure or interruption in the event of future attacks on our system by unauthorized parties.
We rely upon a third-party data center service provider to host certain aspects of our platform and content and any disruption to, or interference with, our use of such services, could impair our ability to deliver our platform, resulting in customer dissatisfaction, damaging our reputation and harming our business.
We utilize data center hosting facilities from a global third-party service provider to make certain content available in our platform. Our operations depend, in part, on our provider’s ability to protect its facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal acts and similar events. The occurrence of spikes in user volume, traffic, natural disasters, acts of terrorism, vandalism or sabotage, or a decision to close a facility without adequate notice, or other unanticipated problems at our provider’s facilities could result in lengthy interruptions in the availability of our platform, which would adversely affect our business.
We may pursue strategic acquisitions, investments and/or divestments. The failure of an acquisition, investment or divestment to produce the anticipated results, or the inability to integrate an acquired company fully, could harm our business.
We may undertake acquisitions, and we may from time to time submit non-binding proposals or acquire or invest in complementary companies or businesses, as part of our strategy to expand our operations, including through acquisitions or investments that may be material in size and/or of strategic relevance. We may also evaluate divestment opportunities whenever we believe that disposing of certain assets would be desirable for our business strategy. The success of any acquisition, investment or divestment will depend on our ability to make accurate assumptions regarding the valuation, operations, growth potential, integration and other factors related to that business. We cannot assure you that our acquisitions, investments or divestments will produce the results that we expect at the time we enter into or complete a given transaction.
In addition, our previous and any future transactions involve a number of risks and challenges that may have a material adverse effect on our business and results, including the following:
|·||the acquisition may not contribute to our commercial strategy or the image of our institution;|
|·||a future acquisition may be subject to approval by Brazil’s Administrative Council for Economic Defense (Conselho Administrativo de Defesa Econômica), or CADE, or other regulatory authorities, which may deny the necessary approvals for, or impose conditions or restrictions on, the acquisition;|
|·||we may face contingent liabilities in connection with, among others things, (i) judicial and/or administrative proceedings of the acquired institutions, including civil, regulatory, tax, labor, social security, environmental and intellectual property proceedings, and (ii) financial, reputational and technical issues, including with respect to accounting practices, financial statement disclosures and internal controls, as well as other regulatory matters, all of which may not be sufficiently indemnifiable under the relevant acquisition agreement;|
|·||acquisition and divestment processes may require additional funds and/or may be time consuming and the attention of our management may be diverted from their day-to-day responsibilities and our operations;|
|·||our investments in acquisitions may not generate the expected returns, and we may mismanage administrative and financial resources as part of the integration process;|
|·||our divestments may not generate the expected outcomes;|
|·||the business model of the institutions we acquire may differ from ours, and we may be unable to adapt them to our business model or do so efficiently;|
|·||we may not be able to integrate efficiently and successfully the operations of the institutions we acquire, including their corporate cultures, personnel, financial systems, distribution or operating procedures;|
|·||certain transactions may impact our financial reporting obligations and the preparation of our consolidated financial statements, resulting in delays to such preparation;|
|·||the acquisitions may generate goodwill, the impairment of which will result in the reduction of our net income and dividends, and our financial statements may be affected as a result of the application of our accounting policies to the results of our acquisitions;|
|·||the transfer of management of the target institution resulting from a change of control or corporate restructuring must be notified to the MEC, within 60 days from the execution of the document implementing the change of control or corporate restructuring, and the MEC may impose additional restrictions on its reaccreditation; and|
|·||we may be unable to provide the acquired company with the necessary resources to support its operations and if, by the time of the reaccreditation of the acquired company with the MEC, the MEC finds that we have failed to meet any applicable reaccreditation requirements, it may impose restrictions or conditions on the reaccreditation of the acquired company, such as being prevented from increasing in vacancies and from admitting new students to the course; in addition the institution may become subject to the administrative supervision process.|
We may require additional funds to continue our expansion strategy. If we are unable to obtain adequate financing on favorable terms to complete any potential acquisition or other significant transaction and implement our expansion plans, our growth strategy may be materially and adversely affected.
In addition, we may face significant challenges in the process of integrating the operations of any acquired companies with our existing business, such as the inability to manage a greater number of geographically dispersed employees and create and implement efficient uniform controls, procedures and policies, in addition to the incurrence of high or unexpected integration costs. As of the date of this prospectus, we have fully integrated the operations of our operating companies with our business. The anticipated benefits of the acquisitions we may pursue will not be achieved unless we successfully and efficiently integrate the acquired companies into our operations and effectively manage, market and apply our business strategy to them. We may also be unable to integrate faculty and personnel with different professional experience and from different corporate cultures, and our relationship with current and new employees, including tutors and professors, may be impaired. In addition, we may face challenges in entering into successful collective bargaining arrangements with unions due to differences in the negotiation procedures followed in the different geographic regions of the acquired companies. If we are not able to manage our expanded operations and these integrations effectively, our business could be materially adversely affected.
We may not be able to appropriately manage the expansion of our business and staff or the increased complexity of our software and platforms, or grow in our addressable market.
We are currently experiencing a period of significant expansion and are facing a number of expansion-related issues, such as the acquisition and retention of experienced and talented personnel, cash flow management, corporate culture and internal controls, among others. These issues and the significant amount of time spent on addressing them may result in the diversion of our management’s attention from other business issues and opportunities. In addition, we believe that our corporate culture and values are critical to our success, and we have invested a significant amount of time and resources building them. If we fail to preserve our corporate culture and values, our ability to recruit, retain and develop personnel and to effectively implement our strategic plans may be harmed.
We must constantly update our software and platform, enhance and improve our billing and transaction and other business systems, and add and train new software designers and engineers, as well as other personnel, to accommodate the increased use of our platform and the new solutions and features we regularly introduce. This process is time-intensive and expensive, and may lead to higher costs in the future. Furthermore, we may need to enter into relationships with various strategic partners, other online service providers and other third parties necessary to our business. The increased complexity of managing multiple commercial relationships could lead to execution problems that can affect current and future revenues, and operating margins.
We cannot assure you that our current and planned platform and systems, procedures and controls, personnel and third-party relationships will be adequate to support our future operations. In addition, our current expansion has placed a significant strain on management and on our operational and financial resources, and this strain is expected to continue. Our failure to manage growth effectively could seriously harm our business, results of operations and financial condition.
The ability to attract, recruit, retain and develop qualified employees is critical to our success and growth.
In order for us to successfully compete and grow, we must attract, recruit, retain and develop the necessary personnel who can provide the needed expertise across the entire spectrum of our intellectual capital needs. We must also develop our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of human capital. However, the market for qualified personnel is competitive, and we may not succeed in recruiting additional personnel or may fail to effectively replace current personnel who depart with qualified or effective successors. We must continue to hire additional personnel to execute our strategic plans. Our effort to retain and develop personnel may also result in significant additional expenses, which could adversely affect our profitability. We cannot assure you that qualified employees will continue to be employed, that we will manage them successfully, or that, in the future, we will be able to attract qualified personnel with similar skills and expertise at equivalent cost and retain them. Failure to retain or attract qualified personnel could have a material adverse effect on our business, financial condition and results of operations.
We utilize third-party logistics service providers for the shipping of all of our collections of printed teaching materials. The successful delivery of our materials to our clients depends upon effective execution by our logistics team and such service providers. Any material failure to execute properly for any reason, including damage or disruption to any service providers’ facilities, would have an adverse effect on our business, financial condition and results of operations.
The delivery of printed books to our hubs and campuses is a seasonal activity, with a cycle beginning with the creation and revision of content generally from April to July, the purchase of printing services from August to October, and delivery from November to January. We have expanded our operations rapidly since our inception. As our size increases, so does the size and complexity of our logistics operation.
There is a high volume of deliveries in November and December, requiring significant involvement in inventory/demand management and relationship and planning alongside the printers. In an industry where one of the most valued indicators is the timely delivery of printed materials, failure to meet deadlines, inadequate logistical planning, disruptions in distribution centers, deficient inventory management, and failure to meet client requirements may damage our reputation, increase returns of our materials or cause inventory losses, and negatively impact our gross margins, results of operations and business.
Substantially all of the inventory for our printed teaching materials is located in warehouse facilities leased and operated by us and then delivered by a third-party shipping company that handles shipping of all physical learning materials. If our logistics service providers fail to meet their obligations to deliver teaching materials to partner schools in a timely manner, or if a material number of such deliveries are incomplete or contain assembly errors, our business and results of operations could be adversely affected. Furthermore, a natural disaster, fire, power interruption, work stoppage or other unanticipated catastrophic event, especially during the period from August through October when we are awaiting receipt of most of the curriculum materials for the academic year and have not yet shipped such materials to our hubs and campuses, could significantly disrupt our ability to deliver our products and operate our business. If any of our material inventory items, warehouse facilities or distribution centers were to experience any significant damage, we would be unable to meet our contractual obligations and our business would suffer.
The interests of our management team may be focused on certain considerations which may not coincide with your interests. In addition, our shareholders may suffer dilution of their interests in our issued share capital and in the value of their investments due to new stock option grants.
Our directors and officers, among others, own shares in the Company and are beneficiaries under our share-based incentive plan. We implemented our share-based incentive plan in 2017. Due to the issuance of stock options to members of our management team, a significant portion of their compensation is closely tied to our results of operations (as measured by our Adjusted EBITDA), which may lead such individuals to direct our business and conduct our activities with an emphasis on certain considerations which may not coincide with your interests. As a result of these factors, the interests of our management team may not coincide with the interests of our other shareholders.
We have approved a share-based incentive plan for our managers and employees which provides for the granting of stock options to participants. Once the options have been exercised by the participants, our board of directors will determine whether our issued share capital should be increased through the issuance of new shares to be subscribed by participants, or if they will be settled through shares held in treasury. In the event settlement occurs through the issuance of new shares, our shareholders will suffer dilution of their interests in our issued share capital and in the value of their investments.
Following the consummation of this offering, we intend to establish a new equity incentive plan, which will govern issuances of equity incentive awards following the closing of this offering. We intend to reserve up to % of our common shares for issuance under our equity incentive plan.
In case of new stock option grants, whether under existing plans or new plans that may be approved by our shareholders at the shareholders’ meeting, our shareholders will be subject to additional dilution. For additional information on our stock option plan, see “Management—Compensation of Directors and Officers” for additional information.
We may be held liable for extraordinary events that may occur at our hubs and/or campuses, which may have an adverse effect on our image and, consequently, our results of operations.
We may be held liable for the actions of principals, coordinators, tutors, professors, employees or other persons connected to us or to third-party service providers, at our hubs and campuses, including allegations of noncompliance by principals, coordinators, tutors, professors or other employees, connected to us or to our hub partners, as the case may be, with specific legislation and regulations implemented by the MEC relating to our programs. In the event of accidents, injuries or other damages affecting students at our campuses or hubs, we may face claims alleging that we were negligent, provided inadequate supervision or were otherwise liable for the injury. We may also be subject to claims alleging that tutors, professors or other employees committed moral or sexual harassment or other unlawful acts. Our insurance coverage may not cover certain indemnifications we may be required to pay, be insufficient to cover these types of claims, or may not cover certain acts or events, and we may also not be able to renew our current insurance policies under the same terms. Such liability claims may affect our reputation and harm our financial results.
We are not insured against all of the risks to which our business is exposed, and the insurance coverage we have may be inadequate to cover all losses and/or liabilities that we may incur in the course of our operations.
We are not insured against all of the risks to which our business may be exposed. Furthermore, the insurance coverage we have may be inadequate or insufficient to cover all losses and/or liabilities that we may incur in the course of our operations. Our existing insurance coverage may also impose conditions for claims with which we may not be able to comply, as a result of which our insurance providers may refuse coverage for losses and/or liabilities that we may incur in the course of our operations. In addition, we may not be able to renew our existing insurance coverage on favorable terms or at all. Accordingly, if we incur a significant liability or loss for which we are not fully insured, our business, financial condition and results of operations could be adversely affected.
We may face restrictions and penalties, and may be subject to proceedings, under the Brazilian Consumer Protection Code in the future.
Brazil has a series of strict consumer protection laws, referred to collectively as the Brazilian Consumer Protection Code (Código de Defesa do Consumidor), or the Consumer Protection Code. These laws apply to all companies in Brazil that supply products or services to Brazilian consumers. They include protection against misleading and deceptive advertising, protection against coercive or unfair business practices and protection in the formation and interpretation of contracts, usually in the form of civil liabilities and administrative penalties for violations.
These penalties are often levied by the Brazilian Consumer Protection Agencies (Fundação de Proteção e Defesa do Consumidor), or PROCONs, which oversee consumer issues on a district-by-district basis. Companies that operate across Brazil may face penalties from multiple PROCONs, as well as from the National Secretariat for Consumers (Secretaria Nacional do Consumidor), or SENACON. Companies may settle claims made by consumers via PROCONs by paying compensation for violations directly to consumers and through a mechanism that allows them to adjust their conduct, called a conduct adjustment agreement (Termo de Ajustamento de Conduta), or TAC.
Brazilian public prosecutors may also commence investigations of alleged violations of consumer rights and require companies to enter into TACs. Companies that violate TACs face potential enforcement proceedings and other potential penalties such as fines, as set forth in the relevant TAC. Brazilian public prosecutors may also file public civil actions against companies who violate consumer rights or competition rules, seeking strict adherence to the consumer protection laws and compensation for any damages to consumers. In certain cases, we may also face investigations and/or sanctions by the CADE, in the event our business practices are found to affect the competitiveness of the markets in which we operate or the consumers in such markets.
In addition, we may also be subject to legal proceedings by current and/or former students alleging breaches of rights granted by the Consumer Protection Code. Even if unsuccessful, these claims may cause negative publicity, reduce enrollment numbers, increase drop-out rates, entail substantial expenses and divert the time and attention of our management, materially adversely affecting our results of operations and financial condition.
We may be adversely affected if we are unable to maintain consistent educational quality throughout our network, including the education materials of our campuses and hubs, or keep or adequately train our faculty, or ensure that our hub partners will maintain their facilities, equipment and team compatible with our required standards at all time.
Our teaching faculty, including tutors and teachers at our hubs and campuses, is essential for maintaining the quality of our programs and the strength of our brand and reputation. We promote training in order for our faculty to attain and maintain the qualifications we require and for us to provide updating programs on trends and changes in their areas. Due to shortages in the supply of qualified professors or tutors, competition for hiring and retaining qualified professionals has increased substantially. We cannot assure you that we will succeed in retaining our current professors or tutors or recruiting or training new professors or tutors who meet our quality standards, particularly as we continue to expand our operations in new regions.
The quality of our academic curricula and the infrastructure of our hubs and campuses are also key elements of the quality of the education we provide. We cannot assure you that we will succeed in identifying facilities with adequate infrastructure for our new hubs, develop adequate infrastructure in properties we acquire or have enough resources to continue expanding through acquisitions or development of new projects. In addition, we cannot assure
you that we will be able to develop academic curricula for our new programs with the same levels of excellence as existing programs and meeting the standards set forth by the MEC. Shortages of qualified tutors and professors, adequate infrastructure or quality academic curricula for new programs according to our business model and the parameters set forth by the MEC, may have a material adverse effect on our business.
Furthermore, the success of our commercial strategy depends on our strategic alliances with our network of hub partners, and on our ability to cooperate effectively with our hub partners. This cooperation depends, in part, on our partners having facilities, equipment and personnel compatible and otherwise able to cooperate with our own. Our partners are independent entities, each of which is responsible for their own installations, the maintenance of adequate equipment and the training of personnel. We may not be able to ensure that our partners will maintain adequate facilities and equipment or that their teams will be sufficiently trained to cooperate effectively with us.
See also “—If we are not able to maintain our current MEC evaluation ratings and the evaluation ratings of our students, we may be adversely affected.”
Our business depends on the continued success of our brand “Uniasselvi”, and if we fail to maintain and enhance recognition of our brand, we may face difficulty enrolling new students, and our reputation and operating results may be harmed.
We believe that market awareness of our brand “Uniasselvi” has contributed significantly to the success of our business. Maintaining and enhancing our brand are critical to our efforts to grow student enrollments. We rely heavily on the efforts of our sales force and our marketing channels, including online advertising, search engine marketing, social media and word-of-mouth. Failure to maintain and enhance our brand recognition could have a material and adverse effect on our business, operating results and financial condition. We have devoted significant resources to our brand promotion efforts in recent years, but we cannot assure you that these efforts will be successful. Additional efforts to promote our brand, or increases in the costs we incur to promote our brand may also result in significant additional expenses, which could adversely affect our profitability. Our ability to attract new customers and retain our existing customers depends on our investments in our brands, on our marketing efforts and the success of our sales team, and the perceived value of our services in comparison with our competitors. If customers fail to distinguish our brands and the content we offer from our competitors, this may lead to decreased sales and revenue, lower margins or a decline in the market share of our brands. If our marketing initiatives are unsuccessful or become less effective, if we are unable to further enhance our brand recognition, if we incur excessive marketing and promotion expenses, if our brand image is negatively impacted by any negative publicity, or if our customers or third parties misuse our brands in a way that results in a poor general perception of our brands, our business and results of operations could be materially and adversely affected.
In addition, if any of our hub partners engages in unlawful activities, the general public may associate such hub partner’s behavior with our brand, generating negative publicity that may adversely affect our reputation.
Our reputation may be negatively influenced by the actions of other for-profit and private institutions.
In recent years, there have been a number of regulatory investigations and civil litigation matters targeting postsecondary for-profit education institutions in Brazil and private higher education institutions in other countries. These investigations and lawsuits have alleged, among other things, deceptive trade practices, noncompliance with MEC regulations, and breach of the requirement that universities be operated as not-for-profit institutions. These allegations have attracted adverse media coverage and have been the subject of federal and state legislative hearings and investigations in the Brazil and in other countries. Allegations against the postsecondary for-profit and private education sectors may affect general public perceptions of for-profit and private educational institutions, including institutions in our network and us, in a negative manner. Adverse media coverage regarding other for-profit or private educational institutions or regarding us directly or indirectly could damage our reputation, reduce student demand for our programs, materially adversely affect our revenues and operating profit or result in increased regulatory scrutiny.
If we are not able to maintain our current MEC evaluation ratings and the evaluation ratings of our students, we may be adversely affected.
We and our students are regularly evaluated and rated by the MEC. If our hubs, campuses, programs or students receive lower scores from the MEC than in previous years in any of its evaluations, including the General Courses
Index (Índice Geral de Cursos), or IGC, the CI, and the ENADE, we may experience a reduction in enrollment and be adversely affected by perceptions of decreased educational quality, which may negatively affect our reputation and, consequently, our results of operations and financial condition.
The number of new distance learning educational hubs which are able to open each year is contingent on our CI: (i) a CI equal to 3 allows us to open 50 new distance learning educational hubs per year; (ii) a CI equal to 4 allows us to open 150 new distance learning educational hubs per year; and (iii) a CI equal to 5 allows us to open 250 new distance learning educational hubs per year. In case of noncompliance with the requirements by the MEC or unsatisfactory evaluation, our rating may be lower and the authorization to open new hubs may be reduced. Such reduction may adversely affect our growth strategy. Finally, in the event that any of our programs receive unsatisfactory evaluations, the higher education institution offering the programs may be required to enter into an agreement with the MEC setting forth proposed measures and timetables to improve the program and remedy the unsatisfactory evaluation. Noncompliance with the terms of the agreement may result in additional penalties on the institution. These penalties could include, but are not limited to, suspending our ability to enroll students in our programs, denial of accreditation or reaccreditation of our institutions or prohibiting us from holding regular class sessions, all of which can adversely affect our results of operations and financial condition.
Our success depends on our ability to operate in strategically located property that is easily accessible by public transportation.
We believe that urban mobility, public transportation systems and transportation costs in many Brazilian cities make the location and accessibility of hubs a decisive factor for students choosing an educational institution. Therefore, a key component of the success of our business consists in finding, renting and/or buying strategically located property that meets the needs of our students. We cannot guarantee that we will be able to keep our current property or acquire new property that is centrally located in the future. In addition, acquisition costs, costs associated with improvements, construction, and repairs of existing properties and rental values for the properties we use might increase in the future and could have a material adverse effect on our business. Finally, due to demographic and socioeconomic changes in the regions in which we operate, we cannot guarantee that the location of our hubs will continue to be attractive and convenient to students.
The quality of the pedagogical content we deliver to our clients is significantly dependent upon the quality of our editors, publishers and purchased content.
The educational materials we provide are a combination of content developed by our internal production team and content purchased from certain publishers in our market. Our editorial team is responsible for producing our materials, working in conjunction with our technology team, to implement additional features and technology delivery. Our content production process requires significant coordination among different teams as well as qualified personnel with appropriate skill sets to ensure the quality of our pedagogical content is maintained. We may not be able to retain, recruit or train qualified employees to produce pedagogical content that meets our standards. Delays in the delivery of content purchased from authors may have a severe impact on our annual content creation schedule. Additionally, a shortage of qualified editors, employees, publishers or suitable purchased content or a decrease in the quality of produced or purchased content, whether actual or perceived, or a significant increase in the cost to engage or retain qualified personnel or acquire content, would have a material adverse effect on our business, financial condition and results of operations.
Failure to protect or enforce our intellectual property and other proprietary rights could adversely affect our business and financial condition and results of operations.
We rely and expect to continue to rely on a combination of trademark, copyright, patent and trade secret protection laws, as well as confidentiality and intellectual property license and assignment agreements with our employees, consultants and third parties with whom we have relationships to protect our intellectual property and proprietary rights. As of the date of this prospectus, we did not have issued patents or patent applications pending in or outside Brazil. We are party to several agreements with third party authors with respect to educational content, for indefinite terms. As of December 31, 2019, we owned 24 trademarks. As of the date of this prospectus, we owned 41 registered domain names in Brazil. We also have six pending trademark applications in Brazil and unregistered trademarks that we use to promote our brand. Our brand is not a registered trademark in the U.S. From time to time, we expect to file additional patent, copyright and trademark applications in Brazil and abroad. Nevertheless, these applications may not be approved or otherwise provide the full protection we seek. Any dismissal of our
“Uniasselvi” trademark application may impact our business. Third parties may challenge any patents, copyrights, trademarks and other intellectual property and proprietary rights owned or held by us. Third parties may knowingly or unknowingly infringe, misappropriate or otherwise violate our patents, copyrights, trademarks and other proprietary rights and we may not be able to prevent infringement, misappropriation or other violation without substantial expense to us.
Furthermore, we cannot guarantee that:
|·||our intellectual property and proprietary rights will provide competitive advantages to us;|
|·||our competitors or others will not design around our intellectual property or proprietary rights;|
|·||our ability to assert our intellectual property or proprietary rights against potential competitors or to settle current or future disputes will not be limited by our agreements with third parties;|
|·||our intellectual property and proprietary rights will be enforced in jurisdictions where competition may be intense or where legal protection may be weak;|
|·||any of the patents, trademarks, copyrights, trade secrets or other intellectual property or proprietary rights that we presently employ in our business will not lapse or be invalidated, circumvented, challenged or abandoned; or|
|·||we will not lose the ability to assert our intellectual property or proprietary rights against, or to license our intellectual property or proprietary rights to, others and collect royalties or other payments.|
If we pursue litigation to assert our intellectual property or proprietary rights, an adverse decision in any of these legal actions could limit our ability to assert our intellectual property or proprietary rights, limit the value of our intellectual property or proprietary rights or otherwise negatively impact our business, financial condition and results of operations. If the protection of our intellectual property and proprietary rights is inadequate to prevent use or misappropriation by third parties, the value of our brand and other intangible assets may be diminished, competitors may be able to more effectively mimic our service and methods of operations, the perception of our business and service to customers and potential customers may become confused in the marketplace and our ability to attract customers may be adversely affected.
We may in the future be subject to intellectual property claims, which are costly to defend and could harm our business, financial condition and operating results.
Because of the large number of authors that participate in our publications, from time to time, third parties may allege in the future that we or our business infringe, misappropriate or otherwise violate their intellectual property or proprietary rights, including with respect to our publications. We cannot guarantee that we are party to enforceable agreements with all the counterparties that have purportedly assigned copyrights or other intellectual property rights to us. If any such agreements are found to be void or are otherwise unenforceable, we could be subject to legal proceedings and the payment of significant fines for unauthorized use of intellectual property. In addition, many companies, including various “non-practicing entities” or “patent trolls,” are devoting significant resources to developing or acquiring patents that could potentially affect many aspects of our business. There are numerous patents that broadly claim means and methods of conducting business on the Internet. We have not exhaustively searched patents related to our technology. In addition, the publishing industry has been, and we expect in the future will continue to be, the target of counterfeiting and piracy. We may implement measures in an effort to protect against these potential liabilities that could require us to spend substantial resources. Any costs incurred as a result of liability or asserted liability relating to sales of unauthorized or counterfeit educational materials could harm our business, reputation and financial condition.
Third parties may initiate litigation against us without warning. Others may send us letters or other communications that make allegations without initiating litigation. We may in the future receive such communications, which we will assess on a case-by-case basis. We may elect not to respond to the communication if we believe it is without merit or we may attempt to resolve disputes out-of-court by electing to pay royalties or other fees for licenses or out-of-court settlements for unforeseeable amounts. If we are forced to defend ourselves against intellectual property claims, whether they are with or without merit or are determined in our favor, we may
face costly litigation, diversion of technical and management personnel, inability to use our current website or inability to market our service or merchandise our products. As a result of a dispute, we may have to develop noninfringing technology, including partially or fully revise any publication that infringes intellectual property rights, enter into licensing agreements, adjust our merchandising or marketing activities or take other actions to resolve the claims. These actions, if required, may be unavailable on terms acceptable to us or may be costly or unavailable. If we are unable to obtain sufficient rights or develop noninfringing intellectual property or otherwise alter our business practices, as appropriate, on a timely basis, our reputation or our brands, our business and our competitive position may be affected adversely and we may be subject to an injunction or be required to pay or incur substantial damages and/or fees and/or royalties.
Most of our services are provided using proprietary software, and our software is mainly developed by our employees, who do not specifically assign to us their copyrights over the software and we are unable to assure you that we have adequate agreements with all of our employees to provide for the assignment of software rights. While applicable law establishes that employers shall have full title over rights relating to software developed by their employees, we could be subject to lawsuits by former employees claiming ownership of such software. As a result, we may be required to obtain licenses of such software, incurring costs relating to payments of royalties and/or damages and we may be forced to cease the use of such software. If we are unable to use certain of our proprietary software as a result of any of the foregoing or otherwise, this could have a material adverse effect on our business, financial condition and results of operations.
In addition, we use open source software in connection with certain of our products and services. Companies that incorporate open source software into their products have, from time to time, faced claims challenging the ownership of open source software and/or compliance with open source license terms. As a result, we could be subject to suits by parties claiming ownership of what we believe to be open source software or noncompliance with open source licensing terms. Some open source software licenses require users who distribute or use open source software as part of their software to publicly disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable terms or at no cost. Any requirement to disclose our proprietary source code or pay damages for breach of contract could have a material adverse effect on our business, financial condition and results of operations.
Unfavorable decisions in our legal or administrative proceedings may adversely affect us.
We are party to legal and administrative proceedings arising from the ordinary course of our business or from nonrecurring corporate, tax or regulatory events, involving our suppliers, hub partners, students and faculty members, as well as tax authorities, especially with respect to civil, tax and labor claims. We, or our Existing Shareholders, directors or officers may, in the future, be party to legal and administrative proceedings, involving the same or other aspects of our business. We cannot guarantee that the results of these proceedings will be favorable to us or that we have made sufficient provisions for liabilities that may arise as a result of these or other proceedings. Even if we adequately address issues raised by any inspection conducted by an agency or successfully defend our case in an administrative proceeding or court action, we may have to set aside significant financial and management resources to settle issues raised by such proceedings or those lawsuits or claims. Adverse decisions in material legal, arbitration or administrative proceedings, even if such proceedings are without merit, may adversely affect our reputation, results of operations and the price of our common shares.
We and our hub partners are periodically required to obtain or renew local licenses and permits, including licenses from the fire department, for some of the real estate we use. Failure to obtain renewals of these licenses and permits in a timely manner may result in penalties, including closures of certain hubs.
The use of our and our hub partners’ buildings is subject to the successful acquisition of an occupancy permit (Habite-se), or equivalent certificate, issued by the municipality where the property is located, certifying that the building has no deficiencies. In addition, nonresidential properties are required to have a use and operations license and/or permit, issued by the competent municipality, and a fire department inspection certificate, issued by the fire department, prior to being used regularly. Such licenses typically expire and must be renewed, occasionally with an associated renewal fee. We and our hub partners may be unable to obtain or duly renew the required licenses and authorizations for the future operation of facilities. In addition, our hub partners are independent entities, and we cannot guarantee that our hub partners will duly obtain or renew local licenses and permits.
The absence of such licenses may result in penalties ranging from fines to forced demolition of the areas that were not built in compliance with applicable codes or, in a worst case scenario, closure of the hubs lacking the licenses and permits. Any penalties imposed, and in particular the forced closure of any of our hubs, may result in a material adverse effect on our business. Moreover, in the event of any accident at our hubs, the lack of such licenses may result in civil and criminal liability, as well as cause the cancellation of eventual insurance policies for the respective hub. Any such developments may have a material adverse effect on us and on our reputation.
Student protests and strikes may disrupt our ability to hold classes as well as our ability to attract and retain students, which could materially adversely affect our operations.
Political, social and economic developments in Brazil may cause protests and disturbances against such conditions, including policies relating to the operation and funding of higher education institutions. These disturbances may involve protests on university campuses, including the occupation of university buildings and the disruption of classes. We are unable to predict whether students at hubs and campuses in our network will engage in various forms of protest in the future. Should we sustain student strikes, protests or occupations in the future, it could have a material adverse effect on our results of operations and on our overall financial condition. Further, we may need to make additional investments in security infrastructure and personnel on our campuses in order to prevent future student protests from disrupting the ability of our hubs and campuses to hold classes. If we are required to make substantial additional investments in security, or if we are unable to identify security enhancements that would prevent future disruptions of classes, that could cause an adverse effect on our results of operations and financial condition. In addition, we may need to pay overtime compensation to certain of our faculty and staff, which may increase our overall costs.
We are currently in the process of registering certain lease agreements or amendments to lease agreements relating to some of the properties we use.
The lease agreements regarding certain real estate properties we use are currently in the process of being registered with the applicable real estate registry offices. We may be delayed in registering our lease agreements or may not be successful in registering our lease agreements due to unforeseen obstacles which may be outside of our control.
Pursuant to Brazilian law, lessees have a right of first refusal in the event that the property they occupy is to be transferred. However, the lessee will only be able to enforce such right against third-parties if the lease agreement is registered in the property’s real estate registry file. If the lease is not registered, the lessee is only entitled to pursue indemnification for losses and damages against the lessor/seller. Brazilian law also provides for a special regime applicable to the leases of real estate properties used for educational purposes that are authorized and inspected by the public authorities, which limits the range of causes of action for eviction of the lessee to the following cases: (i) mutual agreement; (ii) breach of contract or legal violation; (iii) default in the payment of rent and other charges; (iv) need of urgent repairs determined by the public authorities that cannot be regularly completed with the presence of lessee; or (v) in the event the landowner, the committed purchaser or the committed assignee (upon the payment in full of the purchase price or otherwise expressly authorized by the landowner and as long as the title is registered in the real estate record file of the leased real estate property) requests the delivery of the real estate property for purposes of demolition, edification, license or renovation that results in the increase of at least 50% of the useable area of the real estate property.
In the event the eviction is based on items “iv” and “v” above, the eviction order may only be enforced one year of after it is made (except in the event the eviction lawsuit takes longer than one year between summons and sentence, in which case the eviction order shall only be enforced after six months of its decree). Specifically with regard to leased properties where educational services are provided, the eviction order may only be enforced in six up to twelve months from the eviction order and must coincide with the school holidays.
Any areas of the leased property used for activities other than educational services (such as administrative buildings, offices, parking lots, among others) are subject to the regular treatment under Brazilian law. If any such areas are sold to third parties during the term of the lease, the new owner will be entitled to terminate the lease upon a 90-day prior written notice, counted as from the date of such acquisition, and the lessee will be required to vacate the real estate property. If the new owner does not require the lessee to vacate the property within 90 days from the acquisition, the new owner will have to abide by the lease until through to its maturity.
If we fail to register our lease agreements and one of the real estate properties we occupy is sold to third parties without the lessor respecting our right of first refusal, we will not have the right to buy the real estate property and will solely be able to pursue an action for damages and/or indemnification. In addition, with regard to the real estate properties that are used for activities other than educational services, if their respective lease agreements are not registered in the relevant real estate record file, the new owner will be entitled to terminate the lease upon a 90-day prior written notice and, in such case, we will be forced to vacate such real estate property and our business may be adversely affected.
We may not be able to renew the lease agreements for hubs and campuses.
As of the date of this prospectus, we and our hub partners lease all of the real estate properties in which activities are conducted.
According to Brazilian law, a lessee has the right to renew existing leases for subsequent terms equal to the original term of the lease. In order for a lessee to enforce this right, the following criteria must be met: (i) the non-residential lease agreement must have a fixed term equal to or greater than five consecutive years, or, in the event there is more than one agreement or amendment thereto regarding the same real estate property, the aggregate term in any such agreement and amendment must be greater than five consecutive years; (ii) the lessee must have been using the real estate property for the same purpose for a minimum period of three years; and (iii) the lessee must claim the right of renewal at the most one year and at least six months prior to the end of the term of the lease agreement by filing a renewal lawsuit.
Lease agreements with terms lasting less than five years are not entitled to a right of renewal and, as a result the lessor has the right to refuse renewal of the lease upon expiration of its term. Certain lease agreements relating to some of our hubs and campuses have terms lasting less than five years.
If we or our hub partners are forced to close any hubs or campuses due to the termination of a lease agreement and are unable to renew the lease, our business and results of operations may be adversely affected.
If we and our hub partners are unable to upgrade our respective hubs and campuses, they may become less attractive to students and we may fail to grow our business.
All of our hubs and campuses, as well as those of our hub partners, require periodic upgrades to remain attractive to students. Upgrading the facilities at our hubs and campuses or those of our hub partners could be difficult for a number of reasons, including the following:
|·||the applicable properties may not have the capacity or configuration to accommodate proposed renovations;|
|·||construction and other costs may exceed the funds available and/or we or our hub partners may be unable to obtain financing to fund such costs;|
|·||it may be difficult and expensive to comply with local building and fire codes; and|
|·||we or our hub partners may not be able to negotiate reasonable terms with our landlords or developers or complete the work within acceptable time frames.|
Failure by us or our hub partners to upgrade the facilities of our hubs and campuses or those of our hub partners, as applicable could lead to lower enrollment and could cause a material adverse effect on our business, financial condition and results of operations.
Our indebtedness may adversely affect our businesses.
As of December 31, 2019, our total consolidated indebtedness (consisting of lease liabilities and accounts payable from acquisition of subsidiaries) was R$482.7 million. Our consolidated indebtedness may:
|·||limit our capacity to obtain new credit facilities;|
|·||require that we dedicate a substantial portion of our cash flow to service debt payments, which may affect our ability to use our cash flow for working capital, capital expenditures and other general corporate purposes, in addition to complying with our obligations;|
|·||limit our flexibility to plan and react to changes in our businesses and in the sector in which we operate;|
|·||put us at a disadvantage with our competitors, who may have lower levels of indebtedness; and|
|·||increase our vulnerability to negative economic and industrial conditions, including variations in interest rates or stagnation of our business results or of the economy as a whole.|
As a result of our strategy of growing through acquisitions of new entities, we may need additional funds to implement our strategy. If we cannot obtain adequate financing to conclude any potential acquisition and implement our expansion plans, for example as a result of financial institutions declining to extend credit to us on favorable terms or at all due to our existing levels of indebtedness, our growth strategy will be affected and this could have a material adverse effect on our business, financial condition and results of operations.
For further information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”
In certain circumstances, acquisitions of educational institutions must be approved by the CADE.
Brazilian legislation provides that acquisitions of educational institutions meeting certain requirements must be approved by the CADE prior to the completion of the acquisition if one of the companies or group of companies involved has gross annual revenues in Brazil of at least R$750.0 million in the year immediately prior to the acquisition and any other party has gross income of at least R$75.0 million in that same period. As part of this process, the CADE must determine whether the specific transaction affects the competitiveness of the market in question or the consumers in such markets. The CADE may not approve our future acquisitions or may condition approval of our acquisitions on our disposal of some of the operations of the target of the acquisition, or impose restrictions on the operations and commercialization of the target. Failure to obtain approval for future acquisitions or any conditional approvals of future acquisitions may result in expenses that may adversely affect our results of operations and financial condition.
We depend on dividend distributions by our subsidiaries, and we may be adversely affected if the performance of our subsidiaries is not positive. In addition, during the last presidential campaign in Brazil, the current government proposed revoking certain tax exemptions relating to dividends, which could impact our ability to pay any future dividends or cash distributions and to receive dividends or cash distributions from our subsidiaries.
We control a number of subsidiary companies that carry out the business activities of our corporate group. Our ability to comply with our financial obligations and to pay dividends to our shareholders depends on our ability to receive distributions from the companies we control, which in turn depends on the cash flow and profits of those companies. There is no guarantee that the cash flow and profits of our controlled companies will be sufficient for us to comply with our financial obligations and pay dividends or interest on shareholders’ equity to our shareholders. In addition, during the last presidential campaign in Brazil, the current government proposed revoking certain tax exemptions relating to dividends. If enacted, these measures would increase the tax expenses associated with any dividend or distribution, which could impact our ability to pay any future dividends or cash distributions and to receive dividends or cash distributions from our subsidiaries.
Moreover, the payments, dividends and distributions from our subsidiaries to us for funds to pay future cash dividends or distributions, if any, to holders of our common shares, could be restricted under financing arrangements that we or our subsidiaries may enter into in the future and we and such subsidiaries may be required to obtain the approval of lenders to make such payments to us in the event they are in default of their repayment obligations. Furthermore, we may be adversely affected if the Brazilian government imposes legal restrictions on dividend distributions by our Brazilian subsidiaries and exchange rate fluctuations will affect the U.S. dollar value of any distributions our subsidiaries make with respect to our equity interests in those subsidiaries. See “—Risks Relating to Brazil—Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our
common shares,” “Economic uncertainty and political instability in Brazil may harm us and the price of our common shares” and “Dividends and Dividend Policy.”
We and our subsidiaries may be held directly or indirectly responsible for labor claims pursuant to contracted services.
To meet the needs of our students and offer greater comfort and quality in all areas and aspects of our activities, we depend on hub partners, service providers and suppliers, engaged by us or by our hub partners, for services such as cleaning, maintenance, construction and security. We may be adversely affected if these third-party service providers, hub partners and suppliers do not meet their obligations under Brazilian labor laws. In particular, according to Brazilian law we may be liable to the employees of hub partners, these service providers and suppliers for labor obligations of these service providers and suppliers, and may also be fined by the relevant authorities. If we are held liable for such claims, we may be adversely affected.
We are subject to environmental laws and regulations, which may become more stringent in the future and increase our obligations and capital investments with respect to their compliance.
We are subject to several environmental municipal, state and federal laws. Compliance with these laws and regulations is monitored by governmental agencies and bodies that may impose, among others, administrative sanctions on us. These sanctions may include, among other consequences, penalties, such as fines, revocation of our licenses and authorizations, and the temporary or permanent suspension of our activities. In addition, governmental agencies or other authorities may also significantly delay or deny the issuance of permits and authorizations required for our operations, preventing us from making constructions and improvements in our hubs and/or campuses.
The enactment of more stringent laws and regulations or more stringent interpretations of existing laws and regulations may force us to increase our capital expenditures relating to environmental compliance, therefore diverting funds from previously planned investments. These changes could have a material adverse effect on us.
Brazilian legislation establishes that individual or legal entities that conduct activities deemed harmful to the environment will be subject to administrative and criminal liabilities in case of environmental infractions or crimes. In addition, when the misconduct of individuals or legal entities causes environmental damage, such legal entities or individuals are required to remedy it, as a civil environmental liability consequence. In this regard, civil environmental liability pursuant to environmental legislation is strict, joint and several, pursuant to which anyone whose activity may be linked to the environmental damage may be held liable. Nonetheless, the right of redress is guaranteed against the legal entities/individuals that actually caused such damages.
Any delay or denial by environmental agencies of the issuance or renewal of our licenses, as well as our inability to meet the requirements of the environmental agencies during the licensing process, or any environmental liability we may be subject to in the future, may materially adversely affect our reputation, our business and our results of operations.
We may be adversely affected if the Brazilian government changes its investment strategy with respect to education.
According to Law No. 9,394/96, providing education is a duty of the government and of the family, and private education is allowed, in accordance with the terms set forth in applicable law. Historically, direct public investments by the Brazilian government in postsecondary education have been limited to specific schools that are centers of excellence. The limited number of positions available and the competitive nature of the admission process to these institutions significantly restrict access to these institutions by students. However, the Brazilian government may change its policy and increase the competition we face by (i) increasing the level of public investment in basic education and postsecondary education in general, opening a higher amount of positions and increasing the quality of education offered by public entities; and (ii) shifting resources from schools that are centers of excellence and research to public higher education institutions accessible to middle- and low-income working adults, who are our target students. The introduction and extension of affirmative action admission policies by federal and state schools based on income, race or ethnicity criteria could also heighten the level of competition in the industry. In addition, the Brazilian government could reduce investment in public primary and secondary schools, which would diminish the number of students seeking postsecondary education and, in turn, demand for the courses we offer. Any policy change affecting the level of public investment in education may adversely affect us.
We are subject to anti-corruption, anti-bribery, anti-money laundering and other international trade laws and regulations.
We are subject to anti-corruption, anti-bribery, anti-money laundering and other international trade laws and regulations. In particular, we are subject to the Brazilian Anti-corruption Law nº 12.846, to the U.S. Foreign Corrupt Practices Act of 1977, or the FCPA, to the United Kingdom Bribery Act of 2010, as well as economic sanction programs, including those administered by the United Nations, the European Union and the United States, including the U.S. Treasury Department’s Office of Foreign Assets Control, or OFAC. The FCPA prohibits providing anything of value to foreign officials for the purposes of obtaining or retaining business or securing any improper business advantage. As part of our business, we may deal with entities and employees which are considered foreign officials for purposes of the FCPA. In addition, economic sanctions programs restrict our dealings with certain sanctioned countries, individuals and entities. Although we have internal policies and procedures designed to ensure compliance with applicable anti-fraud, anti-bribery and anti-corruption laws and sanctions regulations, potential violations of anti-corruption laws may be identified on occasion as part of our compliance and internal control processes. When such issues arise, we will attempt to act promptly to learn relevant facts, conduct appropriate due diligence and take any appropriate remedial action to address the risk. Given the size and complexity of our operations, there can be no assurance that our internal policies and procedures will be sufficient to prevent or detect all inappropriate practices, fraud or violations of law by our employees, directors, officers, partners, agents and service providers or that such persons will not take actions in violation of our policies and procedures (or otherwise in violation of the relevant anti-corruption laws and sanctions regulations) for which we or they may be ultimately held responsible. Violations of anti-bribery and anti-corruption laws and sanctions regulations could have a material adverse effect on our business, reputation, results of operations and financial condition. In addition, we may be subject to one or more enforcement actions, investigations and proceedings by authorities for alleged infringements of these laws. These proceedings may result in penalties, fines, sanctions or other forms of liability and could have a material adverse effect on our reputation, business, financial condition and results of operations.
Government agencies, the MEC and third parties may conduct inspections, file administrative proceedings or initiate litigation against us.
Because we operate in a highly regulated industry, government agencies, the MEC or third parties may conduct inspections, file administrative proceedings or initiate litigation for noncompliance with regulations against us or the institutions we purchase. If the results of these proceedings or litigations are unfavorable to us, or if we are unable to successfully defend our cases, we may be required to pay monetary damages or be subject to fines, limitations, injunctions or other penalties. Even if we adequately address issues raised by an inspection conducted by an agency or successfully defend our case in an administrative proceeding or court action, we may have to set aside significant financial and management resources to settle issues raised by these proceedings or to those lawsuits or claims. Administrative proceedings or court actions brought against us may damage our reputation, even if such lawsuits or claims are without merit.
Failure to prevent or detect a malicious cyberattack on our systems and databases could result in a misappropriation of confidential information or access to highly sensitive information.
Cyberattacks are becoming more sophisticated and pervasive. Across our business we hold large volumes of personally identifiable information including that of employees, hub partners, students, parents and legal guardians. Individuals may try to gain unauthorized access to our data in order to misappropriate such information for potentially fraudulent purposes, and our security measures may fail to prevent such unauthorized access. A breach could result in a devastating impact on our reputation, with significant adverse effects on customer confidence and loyalty that could adversely affect our financial condition and the student experience. In addition, if we were unable to prove that our systems are properly designed to detect an intrusion, we could be subject to severe penalties under applicable laws and loss of existing or future business.
Any illegal or improper uses of our educational platform, as a result of cyberattacks or otherwise, could expose us to additional liability and harm our business.
Our educational platform is susceptible to unauthorized use, copyright violations and unauthorized copying and distribution (whether by students, schools, hub partners or otherwise), theft, employee fraud, and other similar breaches and violations, whether resulting from cyberattacks or otherwise. Our copyrights may also be challenged by third parties, and we may encounter difficulties in enforcing our copyrights. These occurrences may potentially
harm our business and consequently negatively impact our results of operations. Additionally, we may be required to employ a significant amount of resources to combat such occurrences and identify those responsible.
Failure to comply with data privacy regulations could result in reputational damage to our brands and adversely affect our business, financial condition and results of operations.
The nature of our business exposes us to risks related to possible shortcomings in data protection. Any perceived or actual unauthorized disclosure of personally identifiable information, whether through breach of our network by an unauthorized party, employee theft, misuse or error or otherwise, could harm our reputation, impair our ability to attract and retain our customers, or subject us to claims or litigation arising from damages suffered by individuals.
The laws regulating privacy rights and data protection have considerably evolved over recent years, providing for more restrictive provisions on the means through which processing of personal data by organizations is regulated. As of August 2018, when the GDP Law was enacted, practices involving the processing of personal data were ruled by certain sectorial laws, such as Law No. 8,078/1990 the Consumer Defense Code, and Law No. 12,965, or the Brazilian Civil Rights Framework for the Internet.
On August 15, 2018, the President of Brazil approved the GDP Law, a comprehensive personal data protection law establishing general principles and obligations that apply across multiple economic sectors and contractual relationships. The GDP Law establishes detailed rules for the collection, use, processing and storage of personal data and will affect all economic sectors, including the relationship between customers and suppliers of goods and services, employees and employers and other relationships in which personal data is collected, whether in a digital or physical environment. The obligations established by the GDP Law would initially become effective in August 2020 (24 months from the date of its publication in August 2018), by which date all legal entities would be required to adapt their data processing activities to these new rules.
However, due to the recent developments regarding the Covid-19 outbreak, the president of Brazil has issued Provisional Measure No. 959/2020 which postpones the effectiveness of the GDP Law. This provisional measure is effective for 60 days, extendable for an additional period of a single equal term. The Brazilian Congress has to vote to turn this provisional measure into an ordinary law and, if so, the GDP Law will come into force on May 3, 2021.
As of the date of this prospectus, we have begun taking steps to comply with the GDP Law with the assistance of external counsel. We intend to complete this process by the end of the second half of 2020.
Pursuant to the GDP Law, security breaches that may result in significant risk or damage to personal data must be reported to the National Data Protection Authority (Autoridade Nacional de Proteção de Dados), or ANPD, the data protection regulatory body, within a reasonable time period. The notice to the ANPD must include: (a) a description of the nature of the personal data affected by the breach; (b) the affected data subjects; (c) the technical and security measures adopted; (d) the risks related to the breach; (e) the reasons for any delays in reporting the breach, if applicable; and (f) the measures adopted to revert or mitigate the effects of the damage caused by the breach. Once the GDP Law becomes effective, the penalties and fines for violations include: (i) warnings, with the imposition of a deadline for the adoption of corrective measures; (ii) a one-time fine of up to 2% of gross sales of the company or a group of companies or a maximum amount of R$50.0 million per violation; (iii) a daily fine, up to a maximum amount of R$50.0 million per violation; (iv) public disclosure of the violation; (v) the restriction of access to the personal data to which the violation relates, until corrective measures are implemented; and (vi) deletion of the personal data to which the violation relates. Any additional privacy laws or regulations enacted or approved in Brazil or in other jurisdictions in which we operate could seriously harm our business, financial condition or results of operations.
Failure to comply with the rules for the protection of personally identifiable information, including the GDP Law, could potentially lead to legal proceedings or could result in penalties, significant remediation costs, reputational damage, the cancellation of existing contracts and difficulty in competing for future business. In addition, we could incur significant costs in complying with relevant laws and regulations regarding the unauthorized disclosure of personal information, which may be affected by any changes to data privacy legislation at both the federal and state levels.
Certain Risks Relating to Brazil
The Brazilian federal government has exercised, and continues to exercise, significant influence over the Brazilian economy. This involvement as well as Brazil’s political and economic conditions could harm us and the price of our common shares.
The Brazilian federal government frequently exercises significant influence over the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s actions to control
inflation and other policies and regulations have often involved, among other measures, increases or decreases in interest rates, changes in fiscal policies, wage and price controls, foreign exchange rate controls, blocking access to bank accounts, currency devaluations, capital controls, and import and export restrictions. We have no control over and cannot predict what measures or policies the Brazilian government may take in the future. We and the market price of our securities may be harmed by changes in Brazilian government policies, as well as general economic factors, including, without limitation:
|·||growth or downturn of the Brazilian economy;|
|·||interest rates and monetary policies;|
|·||exchange rates and currency fluctuations;|
|·||liquidity of the domestic capital and lending markets;|
|·||import and export controls;|
|·||exchange controls and restrictions on remittances abroad and payments of dividends;|
|·||modifications to laws and regulations according to political, social and economic interests;|
|·||fiscal policy and changes in tax laws;|
|·||economic, political and social instability, including general strikes and mass demonstrations;|
|·||the regulatory framework governing the educational industry;|
|·||labor and social security regulations;|
|·||energy and water shortages and rationing;|
|·||changes in demographics, in particular declining birth rates, which will result in a decrease in the number of enrolled students in education in the future; and|
|·||other political, diplomatic, social and economic developments in or affecting Brazil.|
Uncertainty over whether the Brazilian federal government will implement reforms or changes in policy or regulation affecting these or other factors in the future may affect economic performance and contribute to economic uncertainty in Brazil, which may have an adverse effect on our activities and consequently our operating results, and may also adversely affect the trading price of our common shares. Recent economic and political instability has led to a negative perception of the Brazilian economy and higher volatility in the Brazilian securities markets, which also may adversely affect us and our common shares. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Brazilian Macroeconomic Environment.”
Economic uncertainty and political instability in Brazil may harm us and the price of our common shares.
Brazil’s political environment has historically influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility in the securities offered by companies with significant operations in Brazil.
The recent economic instability in Brazil has contributed to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. In addition, various ongoing investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor, including the largest such investigations, known as “Operação Lava Jato”, “Operação Zelotes”, “Operação Greenfield”, “Operação Eficiência”, have negatively impacted the Brazilian economy and political environment. The potential outcome of these investigations is uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy.
Additionally, during the months of April and May 2020, the current Brazilian President became involved in controversial political discussions that culminated in the dismissal of the then Minister of Health, Luiz Henrique Mandetta and the resignation of the Minister of Justice, Sergio Moro. Such former ministers were considered important figures within the current Federal Government and the circumstances in which ministerial changes have occurred caused even more instability in the Brazilian economy and capital markets.
As of the date of this prospectus, President Jair Bolsonaro was being investigated by the Brazilian Supreme Federal Court (Supremo Tribunal Federal) for alleged improper acts disclosed by the former Minister of Justice, Mr. Sergio Moro. According to the former minister, the President sought the appointment of certain staff within the Brazilian federal police. If the President is found to have committed the alleged acts, any consequences arising from such investigation, including the initiation of a potential impeachment proceeding, may have material adverse effects on the political and economic environment in Brazil, as well as on Brazilian companies, including some of our subsidiaries.
We cannot predict whether the ongoing investigations will result in further political and economic instability, or if new allegations against government officials and/or executives of private companies will arise in the future.
A failure by the Brazilian government to implement necessary reforms may result in diminished confidence in the Brazilian government’s budgetary condition and fiscal stance, which could result in downgrades of Brazil’s sovereign foreign credit rating by credit rating agencies, negatively impact Brazil’s economy, and lead to further depreciation of the real and an increase in inflation and interest rates, adversely affecting our business, financial condition and results of operations.
Any of the above factors may create additional political uncertainty, which could harm the Brazilian economy and, consequently, our business, and could adversely affect our financial condition, our results of operations and the price of our common shares.
Inflation and certain measures by the Brazilian government to curb inflation have historically harmed the Brazilian economy and Brazilian capital markets, and high levels of inflation in the future would harm our business and the price of our common shares.
In the past, Brazil has experienced extremely high rates of inflation. Inflation and some of the measures taken by the Brazilian government in an attempt to curb inflation have had significant negative effects on the Brazilian economy generally. Inflation, policies adopted to curb inflationary pressures and uncertainties regarding possible future governmental intervention have contributed to economic uncertainty and heightened volatility in the Brazilian capital markets.
According to the National Consumer Price Index (Índice Nacional de Preços ao Consumidor Amplo), or IPCA, which is published by the IBGE, Brazilian inflation rates were 4.31%, 3.75% and 2.95% for the years ended as of December 31, 2019, 2018 and 2017, respectively. Brazil may experience high levels of inflation in the future and inflationary pressures may lead to the Brazilian government’s intervening in the economy and introducing policies that could harm our business and the price of our common shares. One of the tools used by the Brazilian government to control inflation levels is its monetary policy, specifically in regard to interest rates. An increase in the interest rate restricts the availability of credit and reduces economic growth, and vice versa. During recent years there has been significant volatility in the base interest rate (Sistema Especial de Liquidação e Custódia), or SELIC rate target, which ranged from 14.25%, on December 31, 2015, to 4.5% on December 31, 2019. This rate is set by the Monetary Policy Committee of the Brazilian Central Bank (Comitê de Política Monetária), or COPOM. On February 7, 2018, the Monetary Policy Committee reduced the SELIC rate target to 6.75% and further reduced the SELIC rate target to 6.50% on March 21, 2018. The Monetary Policy Committee reconfirmed the SELIC rate target of 6.50% on May 16, 2018 and subsequently on June 20, 2018. As of December 31, 2018, the SELIC rate target was 6.50%. The Monetary Policy Committee reconfirmed the SELIC rate target of 6.50% throughout the first half of 2019 and then began decreasing the rate to 6.00% on July 31, 2019, to 5.50% on September 18, 2019, to 5.00% on October 30, 2019 and to 4.50% on December 11, 2019. The Monetary Policy Committee subsequently decreased the SELIC rate target to 4.25%, 3.75% and then 3.00%. As of the date of this prospectus, the SELIC rate target was 3.00%. Conversely, more lenient government and Central Bank policies and interest rate decreases have triggered and may continue to trigger increases in inflation and, consequently, growth volatility and the need for sudden and significant interest rate increases, which could negatively affect us and increase our indebtedness.
Any change in interest rate, in particular any volatile swings, can adversely affect our growth, indebtedness and financial condition.
Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our common shares.
The Brazilian currency has been historically volatile and has been devalued frequently over the past three decades. Throughout this period, the Brazilian government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the
frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. Although long-term depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter periods of time has resulted in significant variations in the exchange rate between the real, the U.S. dollar and other currencies. In 2014, the real depreciated by 11.8% against the U.S. dollar, while in 2015 it further depreciated by 32%. The real/U.S. dollar exchange rate reported by the Brazilian Central Bank was R$3.2591 per US$1.00 on December 30, 2016, an appreciation of 16.5% against the rate of R$3.9048 per US$1.00 reported on December 31, 2015. In 2017, the real depreciated by 1.5%, with the exchange rate reaching R$3.308 per US$1.00 on December 29, 2017. In 2018, the real depreciated an additional 17.1%, to R$3.875 per US$1.00 on December 31, 2018. The real/U.S. dollar exchange rate reported by the Brazilian Central Bank was R$4.0307 per US$1.00 on December 31, 2019, which reflected a 4.0% depreciation of the real against the U.S. dollar during 2019. As of June 2, 2020, the real/U.S. dollar exchange rate reported by the Brazilian Central Bank was R$5.2601 per US$1.00, a depreciation of 30.5% of the real since December 31, 2019. There can be no assurance that the real will not appreciate or depreciate against the U.S. dollar or other currencies in the future.
A devaluation of the real relative to the U.S. dollar could create inflationary pressures in Brazil and cause the Brazilian government to, among other measures, increase interest rates. Any depreciation of the real may generally restrict access to the international capital markets. It would also reduce the U.S. dollar value of our results of operations. Restrictive macroeconomic policies could reduce the stability of the Brazilian economy and harm our results of operations and profitability. In addition, domestic and international reactions to restrictive economic policies could have a negative impact on the Brazilian economy. These policies and any reactions to them may harm us by curtailing access to foreign financial markets and prompting further government intervention. A devaluation of the real relative to the U.S. dollar may also, as in the context of the current economic slowdown, decrease consumer spending, increase deflationary pressures and reduce economic growth.
On the other hand, an appreciation of the real relative to the U.S. dollar and other foreign currencies may deteriorate the Brazilian foreign exchange current accounts. Depending on the circumstances, either devaluation or appreciation of the real relative to the U.S. dollar and other foreign currencies could restrict the growth of the Brazilian economy and affect our business, results of operations and profitability.
Infrastructure and workforce deficiency in Brazil may impact economic growth and have a material adverse effect on us.
Our performance depends on the overall health and growth of the Brazilian economy. Brazilian GDP growth has fluctuated over the past few years, with contractions of 3.5% and 3.3% in 2015 and 2016, respectively, followed by growth of 1.3% in both 2017 and 2018. Brazilian GDP increased by 1.1% in 2019. Growth is limited by inadequate infrastructure, including potential energy shortages and deficient transportation, logistics and telecommunication sectors, general strikes, the lack of a qualified labor force, and the lack of private and public investments in these areas, which limit productivity and efficiency. Any of these factors could lead to labor market volatility and generally impact income, purchasing power and consumption levels, which could limit growth and ultimately have a material adverse effect on us.
Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may harm the Brazilian economy and the price of our common shares.
The market for securities offered by companies with significant operations in Brazil is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin American and emerging markets, as well as the United States, Europe and other countries. To the extent the conditions of the global markets or economy deteriorate, the business of companies with significant operations in Brazil may be harmed. The weakness in the global economy has been marked by, among other adverse factors, lower levels of consumer and corporate confidence, decreased business investment and consumer spending, increased unemployment, reduced income and asset values in many areas, reduction of China’s growth rate, currency volatility, and limited availability of credit and access to capital. Developments or economic conditions in other emerging market countries have at times significantly affected the availability of credit to companies with significant operations in Brazil and resulted in considerable outflows of funds from Brazil, decreasing the amount of foreign investments in Brazil.
Crises and political instability in other emerging market countries, the United States, Europe or other countries, including increased international trade tensions and protectionist policies, could decrease investor demand for securities offered by companies with significant operations in Brazil, such as our common shares. In June 2016, the
United Kingdom held a referendum in which the majority voted for the United Kingdom to leave the European Union (so-called “Brexit”). The announcement of Brexit caused significant volatility in global stock markets and currency exchange rate fluctuations. The United Kingdom formally left the European Union on January 31, 2020, at which point a transition period began. The United Kingdom is expected to continue to follow certain European Union rules during the transition period; however, the ongoing process of negotiations between the United Kingdom and the European Union will determine the future terms of the United Kingdom’s relationship with the European Union, including access to European Union markets, either during the transitional period or more permanently. We have no control over and cannot predict the effect of Brexit nor over whether and to which effect any other member state will decide to exit the European Union in the future.
The recent Covid-19 pandemic has had a significant effect on the share prices of companies listed on stock markets globally. The resulting volatility in share prices has triggered circuit-breakers (i.e., mechanisms which interrupt the trading of securities for a period of time following a significant fall in the aggregate market capitalization of the stock exchange affect) repeatedly in stock exchanges across the world, including the NYSE. The price of our common shares may be affected by this volatility following the conclusion of this offering. See “Summary—Recent Events”, “Risk Factors—Certain Risks Relating to Our Business and Industry—The Covid-19 outbreak may cause an adverse effect in our operations, including the partial closure of our business. The extension of the Covid-19 pandemic, the perception of its effects, or the way in which such pandemic will impact our business, either on a microeconomic or on a macroeconomic level, are subject to uncertain and unforeseeable future developments, which may have a material adverse effect on our business, financial condition, operating results and cash flow” and “Risk Factors—Certain Risks Relating to Our Business and Industry—Public health threats or outbreaks of communicable diseases could have an adverse effect on our operations and financial results.”
In addition, the 2020 United States presidential election and any unexpected shift in the U.S. Federal Reserve’s monetary policies could result in disruptions to the global economy. These developments, as well as potential crises and other forms of political instability or any other as-of-yet unforeseen development, may harm our business and the price of our common shares.
Any further downgrading of Brazil’s credit rating could reduce the trading price of our common shares.
We and the trading price of our common shares may be harmed by investors’ perceptions of risks related to Brazil’s sovereign debt credit rating. Rating agencies regularly evaluate Brazil and its sovereign credit ratings, which are based on a number of factors including macroeconomic trends, fiscal and budgetary conditions, indebtedness metrics and the perspective of changes in any of these factors.
The rating agencies began to review Brazil’s sovereign credit ratings in September 2015. Subsequently, the three major rating agencies downgraded Brazil’s investment-grade status:
|·||In 2015, Standard & Poor’s initially downgraded Brazil’s credit rating from BBB-negative to BB-positive and subsequently downgraded it again from BB-positive to BB, maintaining its negative outlook, citing a worse credit situation since the first downgrade. On January 11, 2018, Standard & Poor’s further downgraded Brazil’s credit rating from BB to BB-negative. The BB-negative rating was reaffirmed on February 7, 2019 with a stable outlook, which reflects the agency’s expectations that the Brazilian government will be able to implement policies to gradually improve the fiscal deficit, as well as a mild economic recovery, given improvements in consumer confidence.|
|·||In December 2015, Moody’s reviewed and downgraded Brazil’s issue and bond ratings from Baa3 to below investment grade, Ba2 with a negative outlook, citing the prospect of a further deterioration in Brazil’s debt indicators, considering the low growth environment and the challenging political scenario. In April 2018, Moody’s reaffirmed its Ba2 rating, but altered its outlook from “negative” to “stable,” also supported by the projection that the Brazilian government would approve fiscal reforms and that economic growth in Brazil would resume gradually.|
|·||In 2016, Fitch downgraded Brazil’s sovereign credit rating to BB-positive with a negative outlook, citing the rapid expansion of the country’s budget deficit and the worse-than-expected recession. In February 2018, Fitch downgraded Brazil’s sovereign credit rating again to BB-negative, citing, among other reasons, fiscal deficits, the increasing burden of public debt and an inability to implement reforms that would structurally improve Brazil’s public finances. The BB-negative rating was reaffirmed in May 2019.|
Brazil’s sovereign credit rating is currently rated below investment grade by the three main credit rating agencies. Consequently, the prices of securities offered by companies with significant operations in Brazil have been negatively affected. A prolongation or worsening of the current Brazilian recession and continued political uncertainty, among other factors, could lead to further ratings downgrades. Any further downgrade of Brazil’s sovereign foreign credit ratings could heighten investors’ perception of risk and, as a result, cause the trading price of our common shares to decline.
Certain Risks Relating to Our Common Shares and the Offering
There is no existing market for our common shares, and we do not know whether one will develop to provide you with adequate liquidity. If our share price fluctuates after this offering, you could lose a significant part of your investment.
Prior to this offering, there has not been a public market for our common shares. If an active trading market does not develop, you may have difficulty selling any of our common shares that you buy. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market on the NYSE/Nasdaq, or otherwise how liquid that market might become. The initial public offering price for the common shares will be determined by negotiations between us, the selling shareholders and the underwriters and may not be indicative of prices that will prevail in the open market following this offering. Consequently, you may not be able to sell our common shares at prices equal to or greater than the price paid by you in this offering. In addition to the risks described above, the market price of our common shares may be influenced by many factors, some of which are beyond our control, including:
|·||technological innovations by us or competitors;|
|·||the failure of financial analysts to cover our common shares after this offering or changes in financial estimates by analysts;|
|·||actual or anticipated variations in our operating results;|
|·||changes in financial estimates by financial analysts, or any failure by us to meet or exceed any of these estimates, or changes in the recommendations of any financial analysts that elect to follow our common shares or the shares of our competitors;|
|·||announcements by us or our competitors of significant contracts or acquisitions;|
|·||future sales of our shares; and|
|·||investor perceptions of us and the industries in which we operate.|
In addition, the stock market in general has experienced substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular companies affected. These broad market and industry factors may materially harm the market price of our common shares, regardless of our operating performance. In the past, following periods of volatility in the market price of certain companies’ securities, securities class action litigation has been instituted against these companies. This litigation, if instituted against us, could adversely affect our financial condition or results of operations. If a market does not develop or is not maintained, the liquidity and price of our common shares could be seriously harmed.
Our Existing Shareholders will own % of our outstanding common shares, which represent approximately % of the voting power of our issued share capital following the offering, and will control all matters requiring shareholder approval. Our Existing Shareholders’ ownership and voting power limits your ability to influence corporate matters.
Immediately following this offering, our Existing Shareholders will control our company and will own % of our issued share capital (or % if the underwriters’ option to purchase additional common shares is exercised in full). As a result, our Existing Shareholders will control the outcome of all decisions at our shareholders’ meetings, and will be able to elect the members of our board of directors. Our Existing Shareholders will also be able to direct our actions in areas such as business strategy, financing, distributions, acquisitions and dispositions of assets or businesses. For example, our Existing Shareholders may cause us to make acquisitions that increase the amount of our indebtedness or outstanding common shares, sell revenue-generating assets or inhibit change of control transactions that benefit other shareholders. Our Existing Shareholders’ decisions on these matters may be contrary to your expectations or preferences, and our Existing Shareholders may take actions that could be contrary to your interests. Our Existing Shareholders will be able to prevent any other shareholders, including you, from blocking these actions. For further information regarding shareholdings in our company, see “Principal and Selling Shareholders.”
Common shares eligible for future sale may cause the market price of our common shares to drop significantly.
The market price of our common shares may decline as a result of sales of a large number of our common shares in the market after this offering or the perception that these sales may occur. These sales, or the possibility that these sales may occur, also might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
Following the completion of this offering, we will have outstanding common shares (or common shares, if the underwriters exercise in full their option to purchase additional shares). Subject to the lock-up agreements described below, the common shares sold in this offering will be freely tradable without restriction or further registration under the Securities Act by persons other than our affiliates within the meaning of Rule 144 of the Securities Act.
Our controlling shareholders or entities controlled by them or their permitted transferees will, subject to the lock-up agreements described below, be able to sell their shares in the public market from time to time without registering them, subject to certain limitations on the timing, amount and method of those sales imposed by regulations promulgated by the SEC. If our controlling shareholders, the affiliated entities controlled by them or their permitted transferees were to sell a large number of common shares, the market price of our common shares may decline significantly. In addition, the perception in the public markets that sales by them might occur may also cause the trading price of our common shares to decline.
We have agreed with the underwriters, subject to certain exceptions, not to offer, sell or dispose of any shares in our share capital or securities convertible into or exchangeable or exercisable for any shares in our share capital during the 180-day period following the date of this prospectus. Our directors, executive officers and Existing Shareholders have agreed to substantially similar lock-up provisions. However, Goldman Sachs & Co. LLC and BofA Securities, Inc. may, in their sole discretion and without notice, release all or any portion of the shares from the restrictions in any of the lock-up agreements described above. In addition, these lock-up agreements are subject to the exceptions described in “Common Shares Eligible for Future Sale.”
Sales of a substantial number of our common shares upon expiration of the lock-up agreements, the perception that such sales may occur, or early release of these lock-up periods, could cause our market price to fall or make it more difficult for you to sell your common shares at a time and price that you deem appropriate.
Our Articles of Association contain anti-takeover provisions that may discourage a third party from acquiring us and adversely affect the rights of holders of our common shares.
Our Articles of Association contain certain provisions that could limit the ability of others to acquire our control, including a provision that grants authority to our board of directors to establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from seeking to obtain our control in a tender offer or similar transactions.
If securities or industry analysts do not publish research, or publish inaccurate or unfavorable research, about our business, the price of our common shares and our trading volume could decline.
The trading market for our common shares will depend in part on the research and reports that securities or industry analysts publish about us or our business. Securities and industry analysts do not currently, and may never, publish research on our company. If no or too few securities or industry analysts commence coverage of our company, the trading price for our common shares would likely be negatively affected. In the event securities or industry analysts initiate coverage, if one or more of the analysts who cover us downgrade our common shares or publish inaccurate or unfavorable research about our business, the price of our common shares would likely decline. If one or more of these analysts cease coverage of our company or fail to publish reports on us regularly, demand for our common shares could decrease, which might cause the price of our common shares and trading volume to decline.
We do not anticipate paying any cash dividends in the foreseeable future.
We currently intend to retain our future earnings, if any, for the foreseeable future, to fund the operation of our business and future growth. We do not intend to pay any dividends to holders of our common shares. As a result, capital appreciation in the price of our common shares, if any, will be your only source of gain on an investment in our common shares.
Transformation into a public company may increase our costs and disrupt the regular operations of our business.
This offering will have a significant transformative effect on us. Our business historically has operated as a privately owned company, and we expect to incur significant additional legal, accounting, reporting and other expenses as a result of having publicly traded common shares. We will also incur costs which we have not incurred previously, including, but not limited to, costs and expenses for directors’ fees, increased directors’ and officers’ insurance, investor relations, and various other costs of a public company.
We also anticipate that we will incur costs associated with corporate governance requirements, including requirements under the Sarbanes-Oxley Act, as well as rules implemented by the SEC and the NYSE/Nasdaq. We expect these rules and regulations to increase our legal and financial compliance costs and make some management and corporate governance activities more time-consuming and costly, particularly after we are no longer an “emerging growth company.” These rules and regulations may make it more difficult and more expensive for us to obtain director and officer liability insurance, and we may be required to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. This could have an adverse impact on our ability to recruit and bring on a qualified independent board.
The additional demands associated with being a public company may disrupt regular operations of our business by diverting the attention of some of our senior management team away from revenue-producing activities to management and administrative oversight, adversely affecting our ability to attract and complete business opportunities and increasing the difficulty in both retaining professionals and managing and growing our businesses. Any of these effects could harm our business, financial condition and results of operations.
In addition, the public reporting obligations associated with being a public company in the United States may subject us to litigation as a result of increased scrutiny of our financial reporting. If we are involved in litigation regarding our public reporting obligations, this could subject us to substantial costs, divert resources and management attention from our business and seriously undermine our business.
We are a Cayman Islands exempted company with limited liability. The rights of our shareholders, including with respect to fiduciary duties and corporate opportunities, may be different from the rights of shareholders governed by the laws of U.S. jurisdictions.
We are a Cayman Islands exempted company with limited liability. Our corporate affairs are governed by our Articles of Association (as may be amended and restated from time to time) and by the laws of the Cayman Islands. The rights of shareholders and the responsibilities of members of our board of directors may be different from the rights of shareholders and responsibilities of directors in companies governed by the laws of U.S. jurisdictions. In particular, as a matter of Cayman Islands law, directors of a Cayman Islands company owe fiduciary duties to the company and separately a duty of care, diligence and skill to the company. Under Cayman Islands law, directors and officers owe the following fiduciary duties: (i) a duty to act in good faith in what the director or officer believes to be in the best interests of the company as a whole; (ii) a duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose; (iii) directors should not improperly fetter the exercise of future discretion; (iv) a duty to exercise powers fairly as between different sections of shareholders; (v) a duty to exercise independent judgment; and (vi) a duty not to put themselves in a position in which there is a conflict between their duty to the company and their personal interests. Our Articles of Association have varied this last obligation by providing that a director must disclose the nature and extent of his or her interest in any contract or arrangement, and following such disclosure and subject to any separate requirement under applicable law or the listing rules of the NYSE/Nasdaq, and unless disqualified by the chairman of the relevant meeting, such director may vote in respect of any transaction or arrangement in which he or she is interested and may be counted in the quorum at the meeting. Conversely, under Delaware corporate law, a director has a fiduciary duty to the corporation and its stockholders (made up of two components) and the director’s duties prohibit self-dealing by a director and
mandate that the best interest of the corporation and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the shareholders generally. See “Description of Share Capital—Principal Differences between Cayman Islands and U.S. Corporate Law.”
Furthermore, the Cayman Islands has recently enacted the International Tax Co-operation (Economic Substance) Law (2020 Revision), or the Cayman Economic Substance Law. We are required to comply with the Cayman Economic Substance Law. As we are a Cayman Islands company, compliance obligations include filing annual notifications for the Company, which need to state whether we are carrying out any relevant activities and if so, whether we have satisfied economic substance tests to the extent required under the Cayman Economic Substance Law. As it is a new regime, it is anticipated that the Cayman Economic Substance Law will evolve and be subject to further clarification and amendments. We may need to allocate additional resources to keep updated with these developments, and may have to make changes to our operations in order to comply with all requirements under the Cayman Economic Substance Law. Failure to satisfy these requirements may subject us to penalties under the Cayman Economic Substance Law.
Lastly, on February 18, 2020, it was announced that the Cayman Islands has been placed on the list of non-cooperative jurisdictions published by the European Union, or EU, for tax purposes. The Cayman Islands government issued a press release on February 18, 2020 affirming that the jurisdiction introduced appropriate legislative changes on February 7, 2020 relating to the EU's criteria, but that the listing appears to stem from such legislation not being enacted by February 4, 2020, which was the date of the EU’s Code of Conduct Group meeting to advise the EU Finance Ministers prior to the Finance Ministers’ decision regarding the listing on February 18, 2020. The Cayman Islands government press release states that the Cayman Islands remains fully committed to cooperating with the EU, and will continue to constructively engage with them with the view to be delisted as soon as possible. It is unclear as to whether the Cayman Islands being placed on such list will have a significant, or any, effect on us.
New investors in our common shares will experience immediate and substantial book-value dilution after this offering.
The initial public offering price of our common shares will be substantially higher than the pro forma net tangible book value per share of the outstanding common shares immediately after the offering. Based on an assumed initial public offering price of US$ per share (the midpoint of the price range set forth on the cover of this prospectus) and our net tangible book value as of December 31, 2019, if you purchase our common shares in this offering, you will pay more for your shares than the amounts paid by our Existing shareholders for their shares and you will suffer immediate dilution of approximately US$ per share in pro forma net tangible book value. As a result of this dilution, investors purchasing shares in this offering may receive significantly less than the full purchase price that they paid for the shares purchased in this offering in the event of a liquidation. See “Dilution.”
We may need to raise additional capital in the future by issuing securities or use our common shares as acquisition consideration, or may enter into corporate transactions with an effect similar to a merger, which may dilute your interest in our issued share capital and affect the trading price of our common shares.
We may need to raise additional funds to grow our business and implement our growth strategy going forward through public or private issuances of common shares or securities convertible into, or exchangeable for, our common shares, which may dilute your interest in our issued share capital or result in a decrease in the market price of our common shares. In addition, we may also use our common shares as acquisition consideration or enter into mergers or other similar transactions in the future, which may dilute your interest in our issued share capital or result in a decrease in the market price of our common shares. Any fundraising through the issuance of shares or securities convertible into or exchangeable for shares, the use of our common shares as acquisition consideration, or the participation in corporate transactions with an effect similar to a merger, may dilute your interest in our issued share capital or result in a decrease in the market price of our common shares.
We have broad discretion in the use of the net proceeds from this offering and may not use them effectively.
Our management will have broad discretion in the application of the net proceeds from this offering and could spend the proceeds in ways that do not improve our results of operations or enhance the value of our common shares. The failure by our management to apply these funds effectively could result in financial losses that could have a material adverse effect on our business, results of operations and financial condition. Pending their use, we
may invest the net proceeds from this offering in a manner that does not produce income or that loses value. See “Use of Proceeds.”
As a foreign private issuer and an “emerging growth company” (as defined in the JOBS Act) following the completion of this offering, we will have different disclosure and other requirements than U.S. domestic registrants and non-emerging growth companies.
After the completion of this offering and as a foreign private issuer and emerging growth company, we may be subject to different disclosure and other requirements than domestic U.S. registrants and non-emerging growth companies. For example, as a foreign private issuer, in the United States, we are not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare and issue quarterly reports on Form 10-Q or to file current reports on Form 8-K upon the occurrence of specified significant events, the proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit rules applicable to domestic U.S. registrants under Section 16 of the Exchange Act. In addition, we intend to rely on exemptions from certain U.S. rules, which will permit us to follow Cayman Islands legal requirements rather than certain of the requirements that are applicable to U.S. domestic registrants.
We will follow Cayman Islands laws and regulations that are applicable to Cayman Islands exempted companies. However, Cayman Islands laws and regulations applicable to Cayman Islands exempted companies do not contain any provisions comparable to the U.S. proxy rules, the U.S. rules relating to the filing of reports on Form 10-Q or 8-K or the U.S. rules relating to liability for insiders who profit from trades made in a short period of time, as referred to above.
Furthermore, foreign private issuers are required to file their annual report on Form 20-F within 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information, although we will be subject to Cayman Islands laws and regulations having substantially the same effect as Regulation Fair Disclosure. As a result of the above, even though we are required to file reports on Form 6-K disclosing the limited information which we have made or are required to make public pursuant to Cayman Islands law, or are required to distribute to shareholders generally, and that is material to us, you may not receive information of the same type or amount that is required to be disclosed to shareholders of a U.S. company.
The JOBS Act contains provisions that, among other things, relax certain reporting requirements for emerging growth companies. Under this act, as an emerging growth company, we will not be subject to the same disclosure and financial reporting requirements as non-emerging growth companies. For example, as an emerging growth company we are permitted to, and intend to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies. Also, we will not have to comply with future audit rules promulgated by the U.S. Public Company Accounting Oversight Board, or PCAOB (unless the SEC determines otherwise) , and our auditors will not need to attest to our internal controls under Section 404(b) of the Sarbanes-Oxley Act. We may follow these reporting exemptions until we are no longer an emerging growth company. As a result, our shareholders may not have access to certain information that they deem important. We will remain an emerging growth company until the earlier of (1) the last day of the fiscal year (a) following the fifth anniversary of the completion of this offering, (b) in which we have total annual revenues of at least US$1.07 billion, or (c) in which we are deemed to be a large accelerated filer, which means the market value of our common shares that is held by non-affiliates exceeds US$700.0 million as of the most recently completed second fiscal quarter, or (2) the date on which we have issued more than US$1.0 billion in non-convertible debt during the prior three-year period. Accordingly, the information about us available to you will not be the same as, and may be more limited than, the information available to shareholders of a non-emerging growth company. We could be an “emerging growth company” for up to five years, although circumstances could cause us to lose that status earlier, including if the market value of our common shares held by non-affiliates exceeds $700 million as of any June 30 (the end of our second fiscal quarter) before that time, in which case we would no longer be an “emerging growth company” as of the following December 31 (our fiscal year-end). We cannot predict if investors will find our common shares less attractive because we may rely on these exemptions. If some investors find our common shares less attractive as a result, there may be a less active trading market for our common shares and the price of our common shares may be more volatile.
As a foreign private issuer, we are permitted to, and we will, rely on exemptions from certain NYSE/Nasdaq corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s directors consist of independent directors. This may afford less protection to holders of our common shares.
Section 303A of the NYSE Listing Rules/Section 5605 of the Nasdaq equity rules requires listed companies to have, among other things, a majority of their board members be independent, and to have independent director oversight of executive compensation, nomination of directors and corporate governance matters. As a foreign private issuer, however, we are permitted to, and we will, follow home country practice in lieu of the above requirements. See “Description of Share Capital—Principal Differences between Cayman Islands and U.S. Corporate Law.”
We may lose our foreign private issuer status, which would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting and other expenses.
In order to maintain our current status as a foreign private issuer, either (a) more than 50% of our common shares must be either directly or indirectly owned of record by nonresidents of the United States or (b)(i) a majority of our executive officers or directors may not be U.S. citizens or residents, (ii) more than 50% of our assets cannot be located in the United States and (iii) our business must be administered principally outside the United States. If we lose this status, we would be required to comply with the Exchange Act reporting and other requirements applicable to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required to make changes in our corporate governance practices in accordance with various SEC and NYSE/Nasdaq rules. The regulatory and compliance costs to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may be significantly higher than the costs we will incur as a foreign private issuer.
Our shareholders may face difficulties in protecting their interests because we are a Cayman Islands exempted company.
Our corporate affairs are governed by our Articles of Association, by the Companies Law and the common law of the Cayman Islands. The rights of our shareholders and the fiduciary responsibilities of our directors under the laws of the Cayman Islands are not as clearly defined as under statutes or judicial precedent in existence in jurisdictions in the United States. Therefore, you may have more difficulty protecting your interests than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively less formal nature of Cayman Islands law in this area.
While Cayman Islands law allows a dissenting shareholder to express the shareholder’s view that a court sanctioned reorganization of a Cayman Islands company would not provide fair value for the shareholder’s shares, Cayman Islands statutory law does not specifically provide for shareholder appraisal rights in connection with a court sanctioned reorganization (by way of a scheme of arrangement). This may make it more difficult for you to assess the value of any consideration you may receive in a merger or consolidation (by way of a scheme of arrangement) or to require that the acquirer gives you additional consideration if you believe the consideration offered is insufficient. However, Cayman Islands statutory law provides a mechanism for a dissenting shareholder in a merger or consolidation to apply to the Grand Court of the Cayman Islands for a determination of the fair value of the dissenter’s shares if it is not possible for the company and the dissenter to agree on a fair price within the time limits prescribed.
Shareholders of Cayman Islands exempted companies (such as us) have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders. Our directors have discretion under our Articles of Association to determine whether or not, and under what conditions, our corporate records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult for you to obtain information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders in connection with a proxy contest.
Subject to limited exceptions, under Cayman Islands law, a minority shareholder may not bring a derivative action against the board of directors. Class actions are not recognized in the Cayman Islands, but groups of shareholders with identical interests may bring representative proceedings, which are similar.
United States civil liabilities and certain judgments obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands exempted company and substantially all of our assets are located outside the United States. In addition, the majority of our directors and officers are nationals and residents of countries other than the United States. A substantial portion of the assets of these persons is located outside the United States. As a result, it may be difficult to effect service of process within the United States upon these persons. It may also be difficult to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws against us and our officers and directors who are not resident in the United States and the substantial majority of whose assets are located outside the United States.
Further, it is unclear if original actions predicated on civil liabilities based solely upon U.S. federal securities laws are enforceable in courts outside the United States, including in the Cayman Islands and Brazil. Courts of the Cayman Islands may not, in an original action in the Cayman Islands, recognize or enforce judgments of U.S. courts predicated upon the civil liability provisions of the securities laws of the United States or any state of the United States on the grounds that such provisions are penal in nature. Although there is no statutory enforcement in the Cayman Islands of judgments obtained in the United States, courts of the Cayman Islands will recognize and enforce a foreign judgment of a court of competent jurisdiction if such judgment is final, for a liquidated sum, provided it is not in respect of taxes or a fine or penalty, is not inconsistent with a Cayman Islands judgment in respect of the same matters, and was not obtained in a manner which is contrary to the public policy of the Cayman Islands. In addition, a Cayman Islands court may stay proceedings if concurrent proceedings are being brought elsewhere.
Judgments of Brazilian courts to enforce our obligations with respect to our common shares may be payable only in reais. The exchange rate in force at the time may not offer non-Brazilian investors full compensation for any claim arising from our obligations.
Most of our assets are located in Brazil. If proceedings are brought in the courts of Brazil seeking to enforce our obligations in respect of our common shares, we may not be required to discharge our obligations in a currency other than the real. Under Brazilian exchange control laws, an obligation in Brazil to pay amounts denominated in a currency other than the real may only be satisfied in Brazilian currency at the exchange rate, as determined by the Brazilian Central Bank, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange rate variations through the effective payment date. The then-prevailing exchange rate may not afford non-Brazilian investors with full compensation for any claim arising out of or related to our obligations under the common shares.
Our common shares may not be a suitable investment for all investors, as investment in our common shares presents risks and the possibility of financial losses.
The investment in our common shares is subject to risks. Investors who wish to invest in our common shares are thus subject to asset losses, including loss of the entire value of their investment, as well as other risks, including those related to our common shares, us, the sector in which we operate, our shareholder structure and the general macroeconomic environment in Brazil, among other risks.
Each potential investor in our common shares must therefore determine the suitability of that investment in light of its own circumstances. In particular, each potential investor should:
|·||have sufficient knowledge and experience to make a meaningful evaluation of our common shares, the merits and risks of investing in our common shares and the information contained in this prospectus;|
|·||have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation, an investment in our common shares and the impact our common shares will have on its overall investment portfolio;|
|·||have sufficient financial resources and liquidity to bear all of the risks of an investment in our common shares;|
|·||understand thoroughly the terms of our common shares and be familiar with the behavior of any relevant indices and financial markets; and|
|·||be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other factors that may affect its investment and its ability to bear the applicable risks.|
There can be no assurance that we will not be a passive foreign investment company, or PFIC, for any taxable year, which could subject United States investors in our common shares to significant adverse U.S. federal income tax consequences.
Under the Internal Revenue Code of 1986, as amended, or the Code, we will be a PFIC for any taxable year in which, after the application of certain look-through rules with respect to subsidiaries, either (i) 75% or more of our gross income consists of “passive income,” or (ii) 50% or more of the average quarterly value of our assets consists of assets that produce, or are held for the production of, “passive income.” Passive income generally includes dividends, interest, certain non-active rents and royalties, and capital gains. Based on our current operations, income, assets and certain estimates and projections, including as to the relative values of our assets, including goodwill, which is based on the expected price of our common shares, we do not expect to be a PFIC for our 2020 taxable year. However, there can be no assurance that the Internal Revenue Service, or IRS, will agree with our conclusion. In addition, whether we will be a PFIC in 2020 or any future year is uncertain because, among other things, (i) we will hold a substantial amount of cash following this offering, which is categorized as a passive asset, and (ii) our PFIC status for any taxable year will depend on the composition of our income and assets and the value of our assets from time to time (which may be determined, in part, by reference to the market price of our common shares, which could be volatile). Accordingly, there can be no assurance that we will not be a PFIC for any taxable year.
If we are a PFIC for any taxable year during which a U.S. investor holds common shares, we generally would continue to be treated as a PFIC with respect to that U.S. investor for all succeeding years during which the U.S. investor holds common shares, even if we ceased to meet the threshold requirements for PFIC status. Such a U.S. investor may be subject to adverse U.S. federal income tax consequences, including (i) the treatment of all or a portion of any gain on disposition as ordinary income, (ii) the application of a deferred interest charge on such gain and the receipt of certain dividends and (iii) compliance with certain reporting requirements. We do not intend to provide the information that would enable investors to make a qualified electing fund election, or a QEF Election, that could mitigate the adverse U.S. federal income tax consequences should we be classified as a PFIC. A “mark-to-market” election may be available, however, if our common shares are regularly traded on a qualified exchange. For further discussion, see “Taxation—U.S. Federal Income Tax Considerations.”
Presentation of Financial and Other Information
All references to “U.S. dollars,” “dollars” or “$” are to the U.S. dollar. All references to “real,” “reais,” “Brazilian real,” “Brazilian reais,” or “R$” are to the Brazilian real, the official currency of Brazil. All references to “IFRS” are to International Financial Reporting Standards, as issued by the IASB.
Vitru, the company whose common shares are being offered in this prospectus, was incorporated on March 5, 2020, as a Cayman Islands exempted company, under registration number 360670, with limited liability duly incorporated with the Cayman Islands Registrar of Companies. Until the contribution of Vitru Brazil shares to it prior to the consummation of this offering, Vitru will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments.
We maintain our books and records in Brazilian reais, the presentation currency for our financial statements and also the functional currency of our operations in Brazil. We prepare our annual consolidated financial statements in accordance with IFRS, as issued by the IASB. Unless otherwise noted, Vitru Brazil’s financial information presented herein as of and for the years ended December 31, 2019 and 2018 is stated in Brazilian reais, its reporting currency. The consolidated financial information of Vitru Brazil contained in this prospectus is derived from Vitru Brazil’s audited consolidated financial statements as of December 31, 2019 and 2018 and for the years ended December 31, 2019 and 2018, together with the notes thereto. All references herein to “our financial statements,” “our consolidated financial statements,” “our audited consolidated financial information,” and “our audited consolidated financial statements,” are to Vitru Brazil’s audited consolidated financial statements included elsewhere in this prospectus.
This financial information should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited consolidated financial statements, including the notes thereto, included elsewhere in this prospectus.
Following this offering, Vitru will begin reporting consolidated financial information to shareholders, and Vitru Brazil will not present consolidated financial statements. We also maintain our books and records in Brazilian reais and our consolidated financial statements will be prepared in accordance with IFRS, as issued by the IASB.
Vitru Brazil and our fiscal year ends on December 31. References in this prospectus to a fiscal year, such as “fiscal year 2019,” relate to our fiscal year ended on December 31 of that calendar year.
Restatement of Certain Financial Information
As a result of our adoption of IFRS 16 — Leases, or IFRS 16, we were required to change our respective accounting policies. Given that we applied IFRS 16 based on the full retrospective transition approach to each prior reporting period presented, we were also required to restate certain of our financial information as of and for the fiscal year ended December 31, 2018. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Recent Accounting Pronouncements—IFRS 16 – Leases” for further information.
For a reconciliation of our restatement of financial information for comparative purposes in connection with our adoption of IFRS 16, see note 2.6 to our audited consolidated financial statements included elsewhere in this prospectus.
We are a Cayman Islands exempted company incorporated with limited liability on March 5, 2020 for purposes of effectuating our initial public offering. Prior to the consummation of this offering, our Existing Shareholders held 522,315,196 shares of Vitru Brazil, our wholly-owned subsidiary whose consolidated financial statements are included elsewhere in this prospectus.
Our Corporate Reorganization
Prior to the consummation of this offering, our Existing Shareholders will contribute all of their shares in Vitru Brazil to us. In return for this contribution, we will issue new common shares to our Existing Shareholders in a one-to exchange for the shares of Vitru Brazil contributed to us, or the Share Contribution. Until the contribution of Vitru Brazil shares to us, we will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments.
After accounting for the new common shares that will be issued and sold by us in this offering, we will have a total of common shares issued and outstanding immediately following this offering, of these shares will be common shares beneficially owned by our Existing Shareholders, and of these shares will be common shares beneficially owned by investors purchasing in this offering. See “Principal and Selling Shareholders.”
The following chart shows our corporate structure, including our five subsidiaries and their respective business units, after giving effect to our corporate reorganization and this offering:
Below is a brief description of our subsidiaries:
Vitru Brazil (Treviso Empreendimentos, Participações e Comércio S.A.)
Vitru Brazil is an operating subsidiary and the entity whose consolidated financial statements are included in this prospectus. Vitru Brazil was incorporated on June 27, 2014 in Florianópolis, state of Santa Catarina. It is a primarily a holding company through which we hold our remaining subsidiaries listed below, and through which we provide our postgraduate courses.
Uniasselvi – Sociedade Educacional Leonardo da Vinci S/S Ltda. (“Uniasselvi”)
Uniasselvi is our largest subsidiary and was incorporated on January 30, 2004 in Indaial, state of Santa Catarina. Vitru Brazil acquired sole control of Uniasselvi from Kroton on February 28, 2016. We conduct most of our distance learning undergraduate courses through Uniasselvi. Its activities also include conducting on-campus undergraduate and continuing education courses in seven different cities. Uniasselvi holds the following educational entities authorized by the MEC: Sociedade Educacional Leonardo da Vinci S/S Ltda., Centro Universitário Leonardo da Vinci – Uniasselvi, Centro Universitário Dante – Unidante, Faculdade Leonardo da Vinci – Santa Catarina, Faculdade Metropolitana de Rio do Sul – Famesul, Faculdade do Vale do Itajaí Mirim – Favim, Faculdade Metropolitana de Lages – Famelages.
FAMEG – Sociedade Educacional do Vale do Itapocu S/S Ltda (“FAMEG”); FAC Educacional Ltda. (“FAC/FAMAT”) and FAIR Educacional Ltda. (“FAIR”)
FAMEG, FAC/FAMAT and FAIR are the subsidiaries through which we provide on-campus undergraduate and continuing education courses. These subsidiaries were incorporated on July 8, 2008, October 21, 2014 and October 21, 2014, respectively, and were also acquired by us from Kroton in 2016 and 2017. FAMEG, FAC/FAMAT and FAIR hold the following educational entities authorized by the MEC: Sociedade Educacional do Vale do Itapocu S.S. Ltda., Centro Universitário Leonardo da Vinci – Univinci, FAC Educacional Ltda., Instituto de Ensino Superior de Cuiabá, Faculdade de Mato Grosso.
See note 2.2 to our audited consolidated financial statements included elsewhere in this prospectus for additional information on our subsidiaries.
Financial Information in U.S. Dollars
Solely for the convenience of the reader, we have translated some of the real amounts included in this prospectus from Reais into U.S. dollars. You should not construe these translations as representations by us that the amounts actually represent these U.S. dollar amounts or could be converted into U.S. dollars at the rates indicated. Unless otherwise indicated, we have translated real amounts into U.S. dollars using a rate of R$4.0307 to US$1.00, the commercial purchase rate for U.S. dollars at December 31, 2019 as reported by the Brazilian Central Bank.
Special Note Regarding Non-GAAP Financial Measures
This prospectus presents our Adjusted EBITDA, Adjusted Net Income and Adjusted Cash Flow Conversion from Operations information for the convenience of investors, which are non-GAAP financial measures. A non-GAAP financial measure is generally defined as one that purports to measure financial performance but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure.
We calculate Adjusted EBITDA as loss for the year plus:
|·||deferred and current income tax, which is calculated based on our income, adjusted based on certain additions and exclusions provided for in applicable legislation. The income taxes in Brazil consist of corporate income tax (Imposto de Renda Pessoa Jurídica), or IRPJ, CSLL, which are social contribution taxes;|
|·||financial results, which consists of interest expenses less interest income;|
|·||depreciation and amortization;|
|·||interest on tuition fees paid in arrears, which refers to interest received from students on late payments of monthly tuition fees and which is added back;|
|·||impairment of non-current assets, which consists of impairment charges associated with our on-campus undergraduate courses segment, given the deterioration in the prospects of this business;|
|·||share-based compensation plan, which consists of non-cash expenses related to the grant of share-based compensation, as well as fair value adjustments for share-based compensation expenses classified as a liability in our consolidated financial statements;|
|·||other income (expenses), net, which consists of other expenses such as contractual indemnities and deductible donations among others;|
|·||non-recurring expenses, which consists of adjustments that we believe are appropriate to provide additional information to investors about certain material non-recurring items. Such non-recurring expenses comprise:|
|o||mergers and acquisitions, or M&A, and pre-offering expenses, which are expenses related to mergers, acquisitions and divestments (including due diligence, transaction and integration costs), as well as the expenses related to the preparation of offerings; and|
|o||restructuring expenses, which refers to expenses related to employee dismissal costs in connection with organizational and academic restructurings.|
We calculate Adjusted Net Income as loss for the year plus:
|·||share-based compensation plan, as defined above;|
|·||non-recurring expenses, as defined above;|
|·||impairment of non-current assets, as defined above;|
|·||amortization of intangible assets recognized as a result of business combinations, which refers to the amortization of the following intangible assets from business combinations: software, trademark, distance learning operation licenses, non-compete agreements, customer relationship and teaching-learning material. For more information, see note 15 to our audited consolidated financial statements included elsewhere in this prospectus;|
|·||interest accrued at the original effective interest rate (excluding restatement as a result of inflation) on the accounts payable from the acquisition of subsidiaries, related to the acquisition of our operating units from Kroton in 2016 and 2017. See note 17 to our audited consolidated financial statements included elsewhere in this prospectus; and|
|·||corresponding tax effects on adjustments, which represents the tax effect of pre-tax items excluded from adjusted net income (loss). The tax effect of pre-tax items excluded from adjusted net income (loss) is computed using the statutory rate related to the jurisdiction that was impacted by the adjustment after taking into account the impact of permanent differences and valuation allowances.|
We calculate Adjusted Cash Flow Conversion from Operations as adjusted cash flow from operations (which we calculate as cash from operations plus income tax paid) divided by Adjusted EBITDA (as defined above but without taking non-recurring expenses into consideration).
Adjusted EBITDA, Adjusted Net Income and Adjusted Cash Flow Conversion from Operations are the key performance indicators used by us to measure the financial performance of our core operations and we believe that these measures facilitate period-to-period comparisons on a consistent basis. As a result, our management believes that these Non-GAAP financial measures provide useful information to investors and shareholders. The non-GAAP financial measures described in this prospectus are not a substitute for the IFRS measures of earnings. Additionally, our calculations of Adjusted EBITDA, Adjusted Net Income and Adjusted Cash Flow Conversion from Operations may be different from the calculations used by other companies, including our competitors in the education services industry, and therefore, our measures may not be comparable to those of other companies. For a reconciliation of Adjusted EBITDA, Adjusted Net Income and Adjusted Cash Flow Conversion from Operations to the most directly comparable IFRS measure, see “Selected Financial and Other Information.”
Market Share and Other Information
This prospectus contains data related to economic conditions in the market in which we operate. The information contained in this prospectus concerning economic conditions is based on publicly available information from third-party sources that we believe to be reasonable. Market data and certain industry forecast data used in this prospectus were obtained from internal reports and studies, where appropriate, as well as estimates, market research, publicly available information (including information available from the United States Securities and Exchange Commission website) and industry publications. We obtained the information included in this prospectus relating to the industry in which we operate, as well as the estimates concerning market shares, through internal research, a report dated February 27, 2020 by Educa Insights commissioned by us, public information and publications on the industry prepared by official public sources, such as the Brazilian Central Bank, the Brazilian Institute of Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or the IBGE, the United Nations Educational, Scientific and Cultural Organization, or UNESCO, the Organisation for Economic Cooperation and Development, or OECD, the Brazilian Ministry of Education (Ministério da Educação), or the MEC, the Anísio Teixeira National Institute of Educational Studies and Research (Instituto Nacional de Estudos e Pesquisas Educacionais Anísio Teixeira), or the INEP, the Secretariat of Specialized Modalities in Education (Secretário de Modalidades Especializadas de Educação), or Semesp, as well as private sources, such as Educa Insights, Hoper Consultoria and Gismarket, consulting and research companies in the Brazilian education industry, the Brazilian Economic Institute of Fundação Getúlio Vargas (Instituto Brasileiro de Economia da Fundação Getúlio Vargas), or FGV/IBRE, among others.
Industry publications generally state that the information they include has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Although we have no reason to believe any of this information or these reports are inaccurate in any material respect and believe and act as if they are reliable, neither we, the selling shareholders, the underwriters, nor their respective agents have independently verified it. Governmental publications and other market sources, including those referred to above, generally state that their information was obtained from recognized and reliable sources, but the accuracy and completeness of that information is not guaranteed. In addition, the data that we compile internally and our estimates have not been verified by an independent source. Except as disclosed in this prospectus, none of the publications, reports or other published industry sources referred to in this prospectus were commissioned by us or prepared at our request. Except as disclosed in this prospectus, we have not sought or obtained the consent of any of these sources to include such market data in this prospectus.
Calculation of Net Promoter Score
Net Promoter Score, or NPS, is a widely known survey methodology that measures the willingness of customers to recommend a company’s products and services. It is used to gauge customers’ overall satisfaction with a company’s products and services and their loyalty to the brand, and it is typically based on customer surveys. NPS measures satisfaction using a scale of zero to 10 based on a customer’s response to the following question: “How likely is it that you would recommend Uniasselvi to a friend or colleague?” Responses of nine or 10 are considered “Promoters.” Responses of seven or eight are considered neutral. Responses of six or less are considered “Detractors.” The NPS, a percentage expressed as a numerical value, is calculated by subtracting the percentage of respondents who are Detractors from the percentage who are Promoters and dividing that number by the total number of respondents, which means that the higher the number, the higher the measure of customer satisfaction. The NPS calculation gives no weight to customers who decline to answer the survey question. The NPS calculation as of a given date reflects the average of the answers in the previous six months, e.g. the NPS as of December 2019 reflects the average of answers from July 2019 to December 2019.
We have made rounding adjustments to some of the figures included in this prospectus. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of the figures that preceded them.
Cautionary Statement Regarding Forward-Looking Statements
This prospectus contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in this prospectus can be identified by the use of forward-looking words such as “anticipate,” “believe,” “can,” “could,” “expect,” “should,” “plan,” “intend,” “is designed to,” “may,” “might,” “predict,” “estimate” and “potential,” or the negative of these words, among others.
Forward-looking statements appear in a number of places in this prospectus and include, but are not limited to, statements regarding our intent, belief or current expectations. Forward-looking statements are based on our management’s beliefs and assumptions and on information currently available to our management. Such statements are subject to risks and uncertainties, and actual results may differ materially from those expressed or implied in the forward-looking statements due to of various factors, including, but not limited to, those identified under the section entitled “Risk Factors” in this prospectus. These risks and uncertainties include factors relating to:
|·||the impact of the Covid-19 outbreak on general economic and business conditions in Brazil and globally and any restrictive measures imposed by governmental authorities in response to the outbreak;|
|·||our ability to implement, in a timely and efficient manner, any measure necessary to respond to, or reduce the impacts of the Covid-19 outbreak on our business, operations, cash flow, prospects, liquidity and financial condition;|
|·||our ability to efficiently predict, and react to, temporary or long-lasting changes in consumer behavior resulting from the Covid-19 outbreak, including after the outbreak has been sufficiently controlled;|
|·||the downgrading of Brazil’s investment ratings;|
|·||general economic, financial, political, demographic and business conditions in Brazil, as well as any other countries we may serve in the future and their impact on our business;|
|·||fluctuations in interest, inflation and exchange rates in Brazil and any other countries we may serve in the future;|
|·||our ability to implement our business strategy;|
|·||our ability to adapt to technological changes in the educational sector;|
|·||the availability of government authorizations on terms and conditions and within periods acceptable to us;|
|·||our ability to continue attracting and retaining new students;|
|·||our ability to maintain the academic quality of our programs;|
|·||our ability to maintain the relationships with our hub partners;|
|·||our ability to collect tuition fees;|
|·||the availability of qualified personnel and the ability to retain such personnel;|
|·||changes in the financial condition of the students enrolling in our schools in general and in the competitive conditions in the education industry, or changes in the financial condition of our schools;|
|·||our capitalization and level of indebtedness;|
|·||the interests of our controlling shareholders;|
|·||changes in government regulations applicable to the education industry in Brazil;|
|·||government interventions in education industry programs, that affect the economic or tax regime, the collection of tuition fees or the regulatory framework applicable to educational institutions;|
|·||a decline in the number of students enrolled in our programs or the amount of tuition we can charge;|
|·||our ability to compete and conduct our business in the future;|
|·||the success of operating initiatives, including advertising and promotional efforts and new product, service and concept development by us and our competitors;|
|·||changes in consumer demands and preferences and technological advances, and our ability to innovate to respond to such changes;|
|·||changes in labor, distribution and other operating costs;|
|·||our compliance with, and changes to, government laws, regulations and tax matters that currently apply to us;|
|·||other factors that may affect our financial condition, liquidity and results of operations; and|
|·||other risk factors discussed under “Risk Factors.”|
Forward-looking statements speak only as of the date they are made, and we do not undertake any obligation to update them in light of new information or future developments or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence of unanticipated events.
Use of Proceeds
We estimate that the net proceeds from our issuance and sale of common shares in this offering will be approximately US$ (or US$ million if the underwriters exercise in full their option to purchase additional shares), assuming an initial public offering price of US$ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us.
Each US$1.00 increase (decrease) in the assumed initial public offering price of US$ per share would increase (decrease) the net proceeds to us from this offering by approximately US$ , assuming the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us. Each increase (decrease) of 1.0 million in the number of shares we are offering would increase (decrease) the net proceeds to us from this offering, after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, by approximately US$ million, assuming the assumed initial public offering price stays the same.
We intend to use the net proceeds from this offering for organic growth through the expansion of our hybrid platform and course offerings, acquisitions and for other general corporate purposes.
Although we currently anticipate that we will use the net proceeds from this offering as described above, there may be circumstances where a reallocation of funds is necessary. The amounts and timing of our actual expenditures will depend upon numerous factors, including the factors described under ‘‘Risk factors’’ in this prospectus. Accordingly, our management will have flexibility in applying the net proceeds from this offering. An investor will not have the opportunity to evaluate the economic, financial or other information on which we base our decisions on how to use the proceeds.
Pending our use of the net proceeds from this offering, we intend to invest the net proceeds in a variety of capital preservation investments, including short-term, investment-grade, interest-bearing instruments and U.S. government securities. No assurance can be given that we will invest the net proceeds from this offering in a manner that produces income or that does not result in a loss in value.
We will not receive any proceeds from the sale of shares by the selling shareholders.
Dividends and Dividend Policy
We have not adopted a dividend policy with respect to future distributions of dividends. The amount of any distributions will depend on many factors such as our results of operations, financial condition, cash requirements, prospects and other factors deemed relevant by our board of directors and, where applicable, our shareholders. We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business and we do not anticipate paying any cash dividends in the foreseeable future.
Certain Cayman Islands and Brazilian Legal Requirements Related to Dividends
Under the Companies Law and our Articles of Association, a Cayman Islands company may pay a dividend out of either its profit or share premium account, but a dividend may not be paid if this would result in the company being unable to pay its debts as they fall due in the ordinary course of business. According to our Articles of Association, dividends can be declared and paid out of funds lawfully available to us, which include the share premium account. Dividends, if any, would be paid in proportion to the number of common shares a shareholder holds. For further information, see “Taxation—Cayman Islands Tax Considerations.”
Additionally, please refer to “Risk Factors—Certain Risks Relating to Our Business and Industry—We depend on dividend distributions by our subsidiaries, and we may be adversely affected if the performance of our subsidiaries is not positive. In addition, during the last presidential campaign in Brazil, the current government proposed revoking certain tax exemptions relating to dividends, which could impact our ability to pay any future dividends or cash distributions and to receive dividends or cash distributions from our subsidiaries.” Our ability to comply with our financial obligations and to pay dividends to our shareholders depends on our ability to receive distributions from the companies we control, which in turn depends on the cash flow and profits of those companies. If, for any legal reasons due to new laws or bilateral agreements between countries, they are unable to pay dividends to Cayman Islands companies, or if a Cayman Islands company becomes incapable of receiving them, we may not be able to make any dividend payments in the future.
The table below sets forth our total capitalization (defined as long-term debt, excluding current portion and total equity) as of December 31, 2019, as follows:
|·||historical financial information of Vitru Brazil, on an actual basis;|
|·||Vitru, as adjusted to give effect to (i) the incorporation of Vitru and (ii) the contribution of Vitru Brazil to Vitru by the shareholder of Vitru Brazil; and|
|·||Vitru, as further adjusted to give effect to (i) the incorporation of Vitru, (ii) the contribution of Vitru Brazil to Vitru by the shareholder of Vitru Brazil, and (iii) the issuance and sale by Vitru of the common shares in the offering, and the receipt of approximately US$ million (R$ million) in estimated net proceeds, considering an offering price of US$ (R$ ) per common share (the midpoint of the range set forth on the cover of this prospectus), after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, and the use of proceeds therefrom (and assuming no exercise of the underwriters’ option to purchase additional shares and placement of all offered common shares).|
Investors should read this table in conjunction with Vitru Brazil’s consolidated financial statements and the related notes included elsewhere in this prospectus, with the sections of this prospectus entitled “Summary Financial and Other Information,” “Selected Financial and Other Information” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and with other financial information contained in this prospectus.
|As of December 31, 2019|
|Vitru Brazil, actual||Vitru,
as adjusted for the|
as further adjusted for|
the contribution and the
|(in US$)(1)||(in R$)||(in US$)(1)||(in R$)||(in US$)(1)||(in R$)|
|Non-current accounts payable from acquisition of subsidiaries(4)||62.2||250.7|
|Non-current lease liabilities (5)||21.3||85.9|
|(1)||For convenience purposes only, amounts in reais for the year ended December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$4.0307 to US$1.00, the commercial purchase rate for U.S. dollars as of December 31, 2019 as reported by the Brazilian Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.|
|(2)||As adjusted to reflect the (i) the incorporation of Vitru and (ii) the contribution of Vitru Brazil to Vitru by the shareholder of Vitru Brazil.|
|(3)||As further adjusted to give effect to (i) the incorporation of Vitru, (ii) the contribution of Vitru Brazil to Vitru by the shareholder of Vitru Brazil, and (iii) the issuance and sale by Vitru of the common shares in the offering, and the receipt of approximately US$ million (R$ million) in estimated net proceeds, considering an offering price of US$ (R$ ) per common share (the midpoint of the range set forth on the cover of this prospectus), after deduction of the estimated underwriting discounts and commissions and estimated offering expenses payable by us in connection with the offering, and the use of proceeds therefrom (and assuming no exercise of the underwriters’ option to purchase additional shares and placement of all offered common shares).|
|(4)||Non-current accounts payable from acquisition of subsidiaries consist of obligations related to the acquisition of our operating units from Kroton in 2016 and 2017, excluding current portion.|
|(5)||Non-current lease liabilities consist of liabilities from right-of-use assets related to buildings used as offices and hubs, excluding current portion.|
|(6)||Long-term debt consists of non-current accounts payable from acquisition of subsidiaries and non-current lease liabilities.|
|(7)||Each US$1.00 increase (decrease) in the offering price per common share would increase (decrease) our total capitalization and shareholders’ equity by R$ million.|
|(8)||Total capitalization consists of long-term debt, excluding current portion, and total equity.|
Other than as set forth above, there have
been no material changes to our capitalization since December 31, 2019.
Prior to the consummation of this offering and after the Share Contribution, our Existing Shareholders will hold all of our issued and outstanding shares, and we will hold all of the issued and outstanding shares in Vitru Brazil.
We have presented the dilution calculation below on the basis of Vitru Brazil net tangible book value as of December 31, 2019 because (i) until the contribution of Vitru Brazil shares to it, Vitru will not have commenced operations and will have only nominal assets and liabilities and no material contingent liabilities or commitments; and (ii) the number of common shares of Vitru in issuance prior to this offering was the same as the number of shares of Vitru Brazil in issuance as of December 31, 2019 (after accounting for the one-to- contribution).
As of December 31, 2019, Vitru Brazil had a net tangible book value of R$ million, corresponding to a net tangible book value of R$ per share. Net tangible book value represents the amount of our total assets less our total liabilities, excluding goodwill and other intangible assets, divided by , the total number of Vitru Brazil shares outstanding as of December 31, 2019 (after giving effect to the one-to- contribution).
After giving effect to the sale of the common shares offered by us in the offering, and considering an offering price of US$ per common share (the midpoint of the range set forth on the cover of this prospectus), after deducting the estimated underwriting discounts and commissions and estimated offering expenses payable by us, our net tangible book value estimated as of December 31, 2019 would have been approximately US$ million, representing US$ per share. This represents an immediate increase in net tangible book value of US$ per share to the existing shareholder and an immediate dilution in net tangible book value of US$ per share to new investors purchasing common shares in this offering. Dilution for this purpose represents the difference between the price per common shares paid by these purchasers and net tangible book value per common share immediately after the completion of the offering.
If you invest in our common shares, your interest will be diluted to the extent of the difference between the initial public offering price per common share (when converted into reais) and the pro forma net tangible book value per common share after accounting for the issuance and sale of new common shares in this offering.
The following table illustrates this dilution to new investors purchasing common shares in the offering.
|Net tangible book value per share as of December 31, 2019||US$|
|Increase in net tangible book value per share attributable to new investors||US$|
|Pro forma net tangible book value per share after the offering||US$|
|Dilution per common share to new investors||US$|
|Percentage of dilution in net tangible book value per common share for new investors||%|
Each US$1.00 increase (decrease) in the offering price per common share, respectively, would increase (decrease) the net tangible book value after this offering by US$ per common share and the dilution to investors in the offering by US$ per common share.
The Brazilian foreign exchange system allows the purchase and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject to certain regulatory procedures.
The real depreciated against the U.S. dollar from mid-2011 to early 2016. In particular, during 2015, due to the poor economic conditions in Brazil, including as a result of political instability, the real depreciated at a rate that was much higher than in previous years. Overall in 2015, the real depreciated 47.0%, reaching R$3.9048 per US$1.00 on December 31, 2015. In 2016, the real fluctuated significantly, primarily as a result of Brazil’s political instability, appreciating 16.5% to R$3.2585 per US$1.00 on December 31, 2016. In 2017, the real depreciated 1.5% against the U.S. dollar, ending the year at an exchange rate of R$3.3074 per US$1.00. In 2018, the real depreciated 17.1% against the U.S. dollar, ending the year at an exchange rate of R$3.8742 per US$1.00 mainly due to the result of lower interest rates in Brazil as well as uncertainty regarding the results of the Brazilian presidential elections, which were held in October 2018. The real/U.S. dollar exchange rate reported by the Brazilian Central Bank was R$4.0307 per US$1.00 on December 31, 2019, which reflected a 4.0% depreciation in the real against the U.S. dollar during 2019. There can be no assurance that the real will not depreciate or appreciate further against the U.S. dollar. The Brazilian Central Bank has previously intervened in the foreign exchange market to attempt to control instability in foreign exchange rates. We cannot predict whether the Brazilian Central Bank or the Brazilian government will continue to allow the real to float freely or will intervene in the exchange rate market by re-implementing a currency band system or otherwise. The real may depreciate or appreciate substantially against the U.S. dollar in the future. Furthermore, Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are serious reasons to foresee a serious imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. We cannot assure you that the Brazilian government will not place restrictions on remittances of foreign capital abroad in the future.
The following table sets forth, for the periods indicated, the high, low, average and period-end exchange rates for the purchase of U.S. dollars expressed in Brazilian reais per U.S. dollar. The average rate is calculated by using the average of reported exchange rates by the Brazilian Central Bank on each business day during a monthly period and on the last day of each month during an annual period, as applicable. As of June 2, 2020, the exchange rate for the purchase of U.S. dollars as reported by the Brazilian Central Bank was R$5.2601 per US$1.00.
Source: Brazilian Central Bank.
|(1)||Represents the average of the exchange rates on the closing of each business day during the year.|
|(2)||Represents the minimum of the exchange rates on the closing of each business day during the year.|
|(3)||Represents the maximum of the exchange rates on the closing of each business day during the year.|
|June 2020 (through June 2, 2020)||5.2601||5.3120||5.2601||5.3639|
Source: Brazilian Central Bank.
|(1)||Represents the average of the exchange rates on the closing of each business day during the month.|
|(2)||Represents the minimum of the exchange rates on the closing of each business day during the month.|
|(3)||Represents the maximum of the exchange rates on the closing of each business day during the month.|
Prior to this offering, there has been no public market for our common shares. We cannot assure that an active trading market will develop for our common shares, or that our common shares will trade in the public market subsequent to the offering at or above the initial public offering price.
Selected Financial and Other Information
The following tables set forth, for the periods and as of the dates indicated, our selected financial and operating data. The selected consolidated statements of financial position as of December 31, 2019 and 2018 and the summary consolidated statements of profit or loss and other comprehensive income for the years ended December 31, 2019 and 2018 have been derived from the audited consolidated financial statements of Vitru Brazil included elsewhere in this prospectus, prepared in accordance with IFRS, as issued by the IASB.
For convenience purposes only, amounts in reais for the year ended December 31, 2019 have been translated to U.S. dollars using an exchange rate of R$4.0307 to US$1.00, the commercial purchase rate for U.S. dollars as of December 31, 2019 as reported by the Brazilian Central Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted at that or any other exchange rate. See “Exchange Rates” for further information about recent fluctuations in exchange rates.
Amounts as of and for the fiscal year ended December 31, 2018 have been restated as a result of the full retrospective method of adoption of IFRS 16 with the date of initial application of January 1, 2019. For more information, see note 2.6 to our audited consolidated financial statements included elsewhere in this prospectus.
This information should be read in conjunction with “Presentation of Financial and Other Information,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” “Summary Financial and Other Information” and the audited consolidated financial statements of Vitru Brazil, including the notes thereto, included elsewhere in this prospectus.
|For the Years Ended December 31,|
|(in millions, except per share information)|
|Statement of Profit or Loss Data|
|Revenue from distance-learning undergraduate courses||83.4||336.3||259.6|
|Revenue from continuing education courses||11.7||47.1||33.0|
|Revenue from on-campus undergraduate courses||19.3||77.6||90.8|
|Cost of services rendered||(52.5||)||(211.5||)||(184.2||)|
|General and administrative expenses||(31.1||)||(125.3||)||(90.7||)|
|Net impairment losses on financial assets||(14.4||)||(58.2||)||(44.6||)|
|Other income (expenses), net||(0.2||)||(0.9||)||(1.0||)|
|Operating profit (loss)||(8.9||)||(35.9||)||(7.6||)|
|Loss before taxes||(19.1||)||(77.1||)||(50.2||)|
|Current income taxes||(3.7||)||(14.8||)||(10.6||)|
|Deferred income taxes||6.4||25.7||15.7|
|Loss for the year||(16.4||)||(66.2||)||(45.2||)|
|Earnings per common share|
|Basic and diluted earnings per common share — R$||(0.03||)||(0.13||)||(0.09||)|
|As of December 31,|
|US$ millions||R$ millions|
|Statement of Financial Position Data:|
|Cash and cash equivalents||0.6||2.5||2.4|
|Income taxes recoverable||1.2||4.7||5.5|
|Other current assets||0.5||1.9||1.2|
|Assets classified as held for sale(1)||9.1||36.5||—|
|Total current assets||53.4||214.9||252.5|
|Deferred tax assets||9.2||37.1||29.9|
|Other non-current assets||0.3||1.4||1.2|
|Property and equipment||17.4||70.0||63.4|
|Total non-current assets||216.8||873.8||926.5|
|Liabilities and Equity|
|Labor and social obligations||4.2||16.8||16.1|
|Prepayments from customers||0.8||3.2||1.2|
|Accounts payable from acquisition of subsidiaries||32.0||128.9||123.3|
|Other current liabilities||0.1||0.3||0.3|
|Liabilities directly associated with assets classified as held for sale(1)||5.7||23.3||—|
|Total current liabilities||54.9||221.4||175.1|
|Accounts payable from acquisition of subsidiaries||62.2||250.7||335.2|
|Provisions for contingencies||4.6||18.4||18.0|
|Deferred tax liabilities||6.2||25.0||43.4|
|Other non-current liabilities||0.3||1.1||7.5|
|Total non-current liabilities||103.3||416.0||484.5|
|Retained earnings (accumulated losses)||(23.9||)||(96.2||)||(30.1||)|
|Total liabilities and equity||270.2||1,088.7||1,179.0|
|(1)||In December 2019, we decided to sell our subsidiaries FAC/FAMAT and FAIR and the undergraduate operations on the campuses of Assevim and Famesul. As a result of this decision we classified the related assets and liabilities as held for sale, since we understand that the disposal group is available for immediate sale in its present condition subject only to terms that are usual and customary for these types of transactions, that this sale is likely to occur given existing plans and is expected to occur within one year and that an active program to locate a buyer and complete the plan must be initiated. For more information, see note 12 to our audited consolidated financial statements included elsewhere in this prospectus.|
Non-GAAP Financial Measures and Reconciliations
Adjusted EBITDA, Adjusted Net Income and Adjusted Cash Flow Conversion from Operations
|For the Year Ended December 31,|
|US$ millions||R$ millions|
|Loss for the year||(16.4||)||(66.2||)||(45.2||)|
|Adjusted Net Income(2)||14.3||57.7||55.4|
|Cash flow from operations||24.3||98.0||88.0|
|Adjusted Cash Flow Conversion from Operations (3)||75%||75%||79%|
|(1)||For information on how we define Adjusted EBITDA, see “Presentation of Financial and Other Information—Special Note Regarding Non-GAAP Financial Measures.” For a reconciliation of Adjusted EBITDA to our loss for the year, see “—Reconciliations of Non-GAAP Financial Measures—Reconciliation between Adjusted EBITDA and loss for the year.”|
|(2)||For information on how we define Adjusted Net Income, see “Presentation of Financial and Other Information—Special Note Regarding Non-GAAP Financial Measures.” For a reconciliation of Adjusted Net Income, see “—Reconciliations of Non-GAAP Financial Measures—Reconciliation of Adjusted Net Income.”|
|(3)||For information on how we define Adjusted Cash Flow Conversion from Operations, see “Presentation of Financial and Other Information—Special Note Regarding Non-GAAP Financial Measures.” For a reconciliation of Adjusted Cash Flow Conversion from Operations, see “—Reconciliations of Non-GAAP Financial Measures—Reconciliation of Adjusted Cash Flow Conversion from Operations.”|
Reconciliations of Non-GAAP Financial Measures
The following tables set forth reconciliations of Adjusted EBITDA and Adjusted Net Income to our loss for the years ended December 31, 2019 and 2018, our most recent directly comparable financial measures calculated and presented in accordance with IFRS.
For further information on why our management chooses to use these non-GAAP financial measures, and on the limits of using these non-GAAP financial measures, please see “Presentation of Financial and Other Information—Special Note Regarding Non-GAAP Financial Measures.”
Reconciliation between Adjusted EBITDA and loss for the year
The following table below sets forth a reconciliation of our Adjusted EBITDA to our loss for each of the periods indicated:
|For the Year Ended December 31,|
|US$ millions||R$ millions|
|Loss for the year||(16.4||)||(66.2||)||(45.2||)|
|(+) Deferred and current income tax||(2.7||)||(10.9||)||(5.0||)|
|(+) Financial results||10.2||41.2||42.6|
|(+) Depreciation and amortization||15.5||62.4||56.3|
|(+) Interest on tuition fees paid in arrears||2.1||8.3||8.9|
|(+) Impairment of non-current assets||12.7||51.0||33.5|
|(+) Share-based compensation plan||6.5||26.4||7.5|
|(+) Other income (expenses), net||0.2||0.9||1.0|
|(+) Non-recurring expenses||1.1||4.5||8.2|
|(+) M&A and pre-offering expenses||—||—||6.0|
|(+) Restructuring expenses||1.1||4.5||2.2|
|(1)||We calculate Adjusted EBITDA as loss for the year plus deferred and current income tax plus financial results plus depreciation and amortization plus interest on tuition fees paid in arrears plus impairment of non-current assets plus share-based compensation plan plus other income (expenses), net, plus non-recurring expenses, which include M&A and pre-offering expenses as well as restructuring expenses. Adjusted EBITDA is a non-GAAP measure. Our calculation of Adjusted EBITDA may be different from the calculation used by other companies, including our competitors in the industry, and therefore, our measures may not be comparable to those of other companies. For further information see “Presentation of Financial and Other Information—Special Note Regarding Non-GAAP Financial Measures.”|
Reconciliation of Adjusted Net Income
The following table below sets forth a reconciliation of our profit to Adjusted Net Income for each of the periods indicated:
|For the Year Ended December 31,|
|US$ millions, except %||R$ millions, except %|
|Loss for the year||(16.4||)||(66.2||)||(45.2||)|
|(+) Non-recurring expenses||1.1||4.5||8.2|
|(+) Impairment of non-current assets||12.7||51.0||33.5|
|(+) Share-based compensation plan||6.5||26.4||7.5|
|(+) Amortization of intangible assets from business combinations||9.3||37.3||37.3|
|(+) Interest accrued on accounts payable from the acquisition of subsidiaries||5.8||23.4||27.1|
|(+) Corresponding tax effects on adjustments||(4.6||)||(18.7||)||(13.0||)|
|Adjusted Net Income(1)||14.3||57.7||55.4|
|(1)||We calculate Adjusted Net Income as loss for the year plus share-based compensation plan plus non-recurring expenses, plus impairment of non-current assets plus amortization of intangible assets recognized as a result of business combinations plus interest accrued at the original effective interest rate (excluding restatement as a result of inflation) on the accounts payable from the acquisition of subsidiaries plus corresponding tax effects on adjustments. Adjusted Net Income is a non-GAAP measure. Our calculation of Adjusted Net Income may be different from the calculation used by other companies, including our competitors in the industry, and therefore, our measures may not be comparable to those of other companies. For further information see “Presentation of Financial and Other Information—Special Note Regarding Non-GAAP Financial Measures.”|
Reconciliation of Adjusted Cash Flow Conversion from Operations
The following table below sets forth a reconciliation of our Adjusted Cash Flow Conversion from Operations for each of the periods indicated:
|For the Year Ended December 31,|
|US$ millions||R$ millions|
|Cash flow from operations||24.3||98.0||88.0|
|(+) Income tax paid||(3.2||)||(12.7||)||(9.4||)|
|Adjusted Cash Flow from Operations||21.2||85.3||78.6|
|(-) Non-recurring expenses:||(1.1||)||(4.5||)||(8.2||)|
|Adjusted EBITDA excluding non-recurring expenses||28.1||113.1||99.6|
|Adjusted Cash Flow Conversion from Operations (2)||75%||75%||79%|
|(1)||For information on how we define Adjusted EBITDA, see “Presentation of Financial and Other Information—Special Note Regarding Non-GAAP Financial Measures.” For a reconciliation of Adjusted EBITDA to our loss for the year, see “—Reconciliation between Adjusted EBITDA and loss for the year.”|
|(2)||We calculate Adjusted Cash Flow Conversion from Operations as adjusted cash flow from operations (which we calculate as cash from operations plus income tax paid) divided by Adjusted EBITDA (as defined above but without taking non-recurring expenses into consideration). Adjusted Cash Flow Conversion from Operations is a non-GAAP measure. Our|
calculation of Adjusted Cash Flow Conversion from Operations may be different from the calculation used by other companies, including our competitors in the industry, and therefore, our measures may not be comparable to those of other companies. For further information see “Presentation of Financial and Other Information—Special Note Regarding Non-GAAP Financial Measures.”
The following table below sets forth certain of our operating data for each of the periods indicated:
|As of and for the Year Ended December 31,|
|Number enrolled students||240,946||189,295||140,363||115,325|
|Number of distance learning undergraduate students||195,613||148,711||106,576||81,406|
|Number of distance learning graduate students||35,952||30,227||22,910||21,108|
|Number of hubs||545||370||221||72|
Discussion and Analysis
of Financial Condition and Results of Operations
The following discussion of our financial condition and results of operations should be read in conjunction with Vitru Brazil’s audited consolidated financial statements as of December 31, 2019 and 2018 and for the years ended December 31, 2019 and 2018 and the notes thereto, included elsewhere in this prospectus, as well as the information presented under “Presentation of Financial and Other Information,” “Summary Financial and Other Information” and “Selected Financial and Other Information.”
The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results and the timing of events may differ materially from those expressed or implied in such forward-looking statements as a result of various factors, including those set forth in “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors.”
We are the leading pure distance learning postsecondary education group in Brazil based on the number of enrolled undergraduate students as of December 31, 2018, based on the latest available data published in September 2019 by the MEC.
Between 2016 and 2018, we grew at a CAGR of 43.5% in terms of enrolled students in our undergraduate distance learning programs, as shown in the chart below.
Note: The data presented in this chart marked “Market” is derived from public information published by INEP, and for market share comparability purposes, it is calculated by INEP by applying the same metrics for all postsecondary education institutions in Brazil. This data may not be directly comparable with data derived from our internal records included elsewhere in this prospectus.
We provide a differentiated distance learning experience for our students through our disruptive hybrid model, which emphasizes flexibility, affordability and a strong relationship with all stakeholders engaged in our platform. Our hybrid and technology-enabled content is delivered both digitally and through in-person weekly encounters lectured by highly-trained tutors on our extensive hub network. We believe that this unique tutor-centered learning experience sets us apart, creating a stronger sense of community and belonging and contributing to higher engagement and retention rates of our student base.
Our hub partners, who own 81.5% of our hubs, are remunerated by their respective share of the tuition fee collected by us from students, based on a given percentage which is similar across all our partnership agreements. This share is also deducted from tuition fees recognized by us as gross revenue. The percentage is higher in the beginning of the hubs’ operations and is reduced gradually as hubs mature. Therefore, as hubs mature, we should experience an increase in our gross revenues (higher than the increase in tuition fees in the same period) as a result of lower tuition share allocated to our hub partners. We have built and nurtured strong relationships with our 130 hub partners, who play a key role in our expansion.
Our proven quality has allowed us to accelerate the pace of growth and further differentiate ourselves. On June 2019, our CI score, which is measured and published by the MEC, and is based on institutional planning and development, academic and management criteria, was upgraded to 5, from 4 previously (on a scale of 1 to 5), enabling us to open up to 250 hubs per year, compared to a maximum of 150 and 50 new hubs per year for the institutions scoring up to 4 and 3, respectively. Therefore, we have the highest quality standards in higher education in Brazil, as evaluated by the MEC.
Our Business Economics and Cohorts
We believe the combination of the elements of our business model and the strength of the value proposition for the students attracted to our ecosystem has resulted in best-in-class unit economics for our hubs network, which plays a pivotal role in our organic growth strategy.
We believe that an annualized cohort analysis is a useful indicator of demand for our services. We define a cohort as new hubs opened in a year.
We track the cohorts on a semi-annual basis. Our strong cohorts are driven by the maturation of our hubs, our high retention rates, especially after the first year of enrollment, the expansion of our offering (e.g. new courses) and annual tuition adjustments.
The result of our recent cohorts demonstrates our successful track record in developing our ecosystem as set out in the chart below.
The percentages included in the body of each of the above figures show the growth in the overall number of students or tuition base, as applicable, over the periods indicated in relation to the initial year of each cohort which is set to equal 100%. The percentages on the vertical axis under the heading “CAGR” of each of the above figures show the CAGR of our cohorts over the periods indicated. The number of students in our base cohort (which comprises the hubs existing prior to 2017) grew at a CAGR of 5.9% between the first semester of 2017 and the first semester of 2019, while our 2017 (which comprises the hubs opened in 2017) and 2018 (which comprises the hubs opened in 2018) cohorts grew at a CAGR of 185.4% and 299.6%, since their respective inception, driven by high intakes and retention rates, introduction of undergraduate courses already offered in other operating hubs, and the natural maturation of each hub.
Moreover, the tuition of our base cohort, our 2017 cohort and 2018 cohort grew even faster at a CAGR of 8.8%, 208.1% and 376.5%, respectively, as a result of the abovementioned factors, as well as our ability to increase tuition prices above inflation and the changes of our mix of courses through time.
We remain focused on our primary mission: to provide students full access to distance learning education and improve their experience through a disruptive hybrid model. We believe this focus helped us grow and expand our business to several regions in Brazil in recent years, and is a key driver for differentiating ourselves from our competition. A large part of this growth was based on the strategic decision to start expanding into small and medium-sized cities and being the first institution to implement educational units and provide access to higher education for residents of cities in the countryside. Based on the most recent available data of the MEC, as of December 31, 2018, we were ranked at least second in terms of market share in 89% of the cities in which we operate, which is a strong indication of the strength of our brand and unique value proposition. We aim to democratize access to higher education through distance learning and empower every student to create his or her own success story.
Our revenue growth is a result of our business model, which has been based on the opening of new hubs, ramp-up of current hubs, annual price adjustments and expansion of course offerings:
|·||Grow Our Base of Uniasselvi Hubs. As of December 31, 2019, our network consisted of 545 hubs, compared to, respectively, 370 hubs, 221 hubs and 72 hubs as of December 31, 2018, 2017 and 2016, amounting to a CAGR of 96.3% from 2016 through 2019. We expect to continue to launch new hubs to increase our coverage and market penetration. We believe our strategy of targeting small-and-medium sized and underserved cities provides us with a significant growth opportunity. Moreover, we believe that we now have the critical mass to grow in denser regions, such as the states of São Paulo and Rio de Janeiro, where our presence is still relatively small.|
|·||Maturation of Recently-Opened Hubs. Over the last years, we significantly increased the number of students per hub in the 2017, 2018 and 2019 cohorts. 86.8% of our hubs were opened in the last five semesters (i.e., in the last two and a half years) and are still ramping up, and we believe there is space to grow our operations, margins and student base. The maturation of a hub takes at least eight semesters, or four years, which is the average duration of a course, and the number of students per hub may continue to grow after such period as hubs gain more local recognition over time. As of December 31, 2019, we operated 545 hubs at different maturation stages.|
|·||Tuition Fees. We typically adjust our tuition fees on an annual basis, at rates above the variation of inflation indices for the previous twelve months.|
|·||Mix of Courses. We have continuously added high-value courses to our portfolio over time, such as engineering and health-related courses, contributing to higher margins.|
Key Business Metrics
We review the following key metrics to evaluate our business, measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions:
Contribution of Distance Learning to Total Net Revenue
We believe the metric that best demonstrates our focus on distance learning education (comprising both undergraduate courses and continuing education courses) and its relevance to our services offering is net revenue from distance learning as a percentage of our total net revenue.
For the years ended December 31, 2019 and 2018, net revenue related to distance learning businesses was 82.7% and 75.8%, respectively, of our total net revenue.
The number of enrolled students is one of the most significant operational metrics tracked by our management team. It represents the total number of students enrolled in the courses we provide.
As of December 31, 2019, 2018, 2017 and 2016, we had 240,946, 189,295, 140,363 and 115,325 enrolled students, respectively, representing a CAGR of 27.8%.
In our distance learning undergraduate courses, our most important business, we had 195,613, 148,711, 106,576, and 81,406 students as of December 31, 2019, 2018, 2017 and 2016, respectively, representing a CAGR of 34%. In our distance learning graduate courses, our second most important business, we had 35,952, 30,227, 22,910 and 21,108 students as of December 31, 2019, 2018, 2017 and 2016, respectively, representing a CAGR of 19%.
Number of Hubs
We have substantially expanded our operations and geographic presence throughout Brazil with the opening of new hubs in the last years. The number of hubs is one of the drivers that enable us to increase our base of enrolled students.
Our network as of December 31, 2019 consisted of 545 hubs across all Brazilian states, compared with 370 hubs as of December 31, 2018, 221 hubs as of December 31, 2017 and 72 hubs as of December 31, 2016, representing a CAGR of 96.3%.
The following table sets forth the number of hubs for the periods presented.
|As of December 31|
|Number of Hubs||545||370||221||72|
Number of Students per Hub in Each Cohort
We believe that the number of students per hub in each cohort is useful in showing hub maturation and the ramp-up in attracting and maintaining new students.
We believe that our hubs currently have substantial growth potential due to the ramp-up of their operations, considering that the average period until the graduation of the first class of a hub is approximately four years or eight semesters. As of December 31, 2019, we had 473 hubs yet to mature, defined as hubs opened with less than four years, or eight semesters, of operations.
The analysis of the number of students per hub must be done for each cohort, given the different maturity levels of the cohorts. For example, as of December 31, 2019, 2018 and 2017, we had 353, 221 and 63 students per hub in the 2017 cohort hubs, respectively, representing a CAGR of 137.4%.
The following table sets forth the number of students per hub evolution for the periods presented, for each of the cohorts.
|As of December 31|
|Number of Hubs|
|Students per Hub|
As can be seen in the table above, the number of students per hub in the base cohort has decreased over time. Before the regulatory change that was implemented in June 2017, the opening of a new hub was a long and cumbersome process. In that context, our 34 base cohort partners had 72 very dense and large hubs. With the new regulatory framework, our base cohort partners were able to easily open several new hubs in the same cities as the previous hubs, hence providing a more geographically spread out offering within each city, which was more convenient for our students and helped improve our intake and retention processes. Likewise, the average number of students per city was 434, 456, 327 and 250 students per hub, as of December 31, 2019, 2018, 2017 and 2016, respectively, representing a CAGR of 20.1%.
Revenue Recognition and Seasonality
Our net revenue consists primarily of tuition fees charged for our undergraduate and graduate courses. Revenue from tuitions are recognized over time when services are rendered to the customer and we satisfy our performance obligations under the contract at an amount that reflects the consideration to which we expect to be entitled in exchange for those services. Revenue from tuition are recognized net of scholarships and other discounts, refunds and taxes. Other revenue are recognized at a point in time when the service is rendered to the customer at an amount that reflects the consideration to which we expect to be entitled in exchange for the service. Other revenue are presented net of the corresponding discounts, refunds and taxes.
Most of our net revenue is derived from students who study in hubs managed by our hub partners. We enter into these partnerships through contracts with hub partners who provide support centers with infrastructure for our students. Each hub partner is responsible for rental costs and property maintenance, as well as administrative services, cleaning, local student service and infrastructure of the hubs. We typically enter into contracts with our hub partners for an initial six-month term. The contracts are automatically renewable after the first six month period and every six months thereafter unless terminated in accordance with their terms.
Our hub partners are remunerated by their respective share of the tuition fee collected by us from students, based on a given percentage which is similar across all our partnership agreements. This share is also deducted from tuition fees recognized by us as gross revenue. The percentage is higher in the beginning of the hubs’ operations and is reduced gradually as hubs mature. Therefore, as hubs mature, we should experience an increase in our gross revenue (higher than the increase in tuition fees in the same period) as a result of lower tuition share allocated by our hub partners. See “Business—Our Disruptive Hybrid Model—Strong Network of Hub Partners” for additional information on our agreements with our hub partners.
Our distance learning undergraduate courses are structured around separate monthly modules. This enables students to enroll in distance learning courses at any time during a semester. Despite this flexibility, we generally experience a higher number of enrollments in distance learning courses in the first and third quarters of each year. These periods coincide with the beginning of academic semesters in Brazil. Furthermore, we generally experience a higher number of enrollments at the beginning of the first semester of each year than at the beginning of the second semester of each year. The seasonality in enrollments has a direct impact on our revenues. We generally record higher revenue in the second and fourth quarters of each year as the impact of discounts to incoming students is lower and dropout rates are also lower. For reference, below is the variation percentage of our net revenue over the financial years ended on December 31, 2018 and 2019:
|Three Months Ended||Year Ended||Three Months Ended||Year Ended|
|Dec 31, 2018||Mar 31,|
|(Unaudited) (in R$ millions, except percentages)|
|Seasonality (percentage of total revenue)||23.4%||26.7%||23.1%||26.8%||—||23.2%||27.7%||23.7%||25.4%||—|
A significant portion of our expenses are also seasonal. Due to the nature of our business cycle, a significant amount of selling and marketing expenses are required to cover costs in connection with the first semester intake, which in Brazil is typically in December, January and February.
As a result, we expect quarterly fluctuations in our revenues and operating results to continue. These fluctuations could result in volatility and adversely affect our performance, liquidity and cash flows. As our business grows, these seasonal fluctuations may become more pronounced. As a result, we believe that sequential quarterly comparisons of our financial results may not provide an accurate assessment of our results of operations.
Our internal financial reports are based on three operating segments. They represent main lines of service from which we generate revenue. The operating segment reporting are:
|·||Distance learning undergraduate courses. What differentiates our distance learning model is its hybrid methodology, which consists of weekly in-person meetings with on-site tutors, besides the benefit of the virtual learning environment, where students are able to study where and when they prefer. Our portfolio of courses is composed mainly of pedagogy, business administration, accounting, physical education, vocational, engineering and health-related courses;|
|·||Continuing education courses. We offer continuing education courses predominantly in pedagogy, finance and business. We also offer continuing education courses in other subjects such as law, engineering, IT and health-related courses. Courses are offered in three different versions, consisting of (i) hybrid model, (ii) 100% online and (iii) on-campus;|
|·||On-campus undergraduate courses. We have 10 campuses that offers traditional on campus undergraduate courses, including business administration, accounting, physical education, vocational, engineering, law and health-related courses.|
Brazilian Macroeconomic Environment
All of our operations are located in Brazil. As a result, our revenues and profitability are affected by political and economic developments in Brazil and the effect that these factors have on the availability of credit, disposable income, employment rates and average wages in Brazil. Our operations, and the industry in general, are particularly sensitive to changes in economic conditions.
Brazil is the largest economy in Latin America, as measured by gross domestic product, or GDP. The following table shows data for real GDP, inflation and interest rates in Brazil and the U.S. dollar/real exchange rate at the dates and for the periods indicated.
|As of and for the Year Ended December 31,|
|Real growth in gross domestic product||1.1%||1.3%||1.3%|
|Inflation (deflation) (IGP-M)(1)||7.3%||7.5%||(0.5)%|
|CDI interest rate (3)||6.0%||6.5%||10.1%|
|Period-end exchange rate—reais per US$1.00(5)||R$4.031||R$3.875||R$3.308|
|Average exchange rate—reais per US$1.00(6)||R$3.946||R$3.656||R$3.203|
|Depreciation of the real vs. US$ in the period(7)||(4.0)%||(17.1)%||(1.5)%|
Source: FGV, IBGE, Brazilian Central Bank and Bloomberg.
|(1)||Inflation (IGP-M) is the general market price index measured by the FGV.|
|(2)||Inflation (IPCA) is a broad consumer price index measured by the IBGE.|
|(3)||The CDI (certificado de depósito interbancário) interest rate is an average of interbank overnight rates in Brazil, accumulated during the corresponding period.|
|(4)||The SELIC rate is the base interest rate (Sistema Especial de Liquidação e Custódia) in Brazil.|
|(5)||Annual rate at the end of the period.|
|(6)||Average of the exchange rate on each business day of the year.|
|(7)||Comparing the US$ closing selling exchange rate as reported by the Brazilian Central Bank at the end of the period’s last day with the day immediately prior to the first day of the period discussed.|
|(8)||Average unemployment rate for year as measured by the IBGE.|
Inflation directly affects most of our current operating costs and expenses, adjusted by reference to indexes that reflect the inflation rate such as the IGP-M or IPCA. For instance, our most important cost component is personnel, which accounted for 48.6% and 46.1% of our total costs and expenses in 2019 and 2018, respectively, and is clearly impacted by inflation rates. Historically, inflation has been offset by our ability to adjust our tuition fees in rates that are typically above the variation of inflation indexes, due mostly to the increase in the content density and complexity over the course. Our financial performance is also tied to fluctuations in interest rates, such as the CDI rate, because such fluctuations affect the value of our financial investments.
In addition, the recent Covid-19 is expected to have a significant effect on demand in 2020. Business operations across Latin America, Asia, Europe and the United States are being affected with factory disruptions and closures, quarantined workers and shortages of components, with a direct impact on the availability of goods and services. These disruptions to global supply chains could impact businesses generally and weaken demand from consumers. The effects cannot be foreseen and are expected to lead to a global economic slowdown in 2020.
Components of Our Results of Operations
Our revenue consists primarily of tuition fees charged for distance-learning undergraduate courses, on-campus undergraduate courses, and continuing education courses. We also generate revenue from student fees and certain education-related activities.
Revenue from tuition fees is recognized over time when services are rendered to the customer and we satisfy our performance obligation under the contract at an amount that reflects the consideration that we expect to receive
for those services. Revenues from tuition fees is recognized net of scholarships and other discounts, refunds and taxes.
Other revenues are recognized at a point in time when the service is rendered to the customer at an amount that reflects the consideration that we expect to receive for those services. Other revenues are presented net of the corresponding discounts, returns and taxes.
Joint operations with hub partners
A hub is a local operating unit owned by us or by third party hub partners. Each hub partner is responsible for offering students access to audiovisual resources, a library and information technology support to enable students to take part in our distance-learning courses.
Our contractual agreements with each hub partner determine that the applicable is a joint operation. Such contractual agreements also establish the rights of each hub partner to receive revenues from the operation of the hub and include provisions relating to expenses incurred in the operation of the hub. Accordingly, the revenue from distance-learning courses and related accounts receivable are recognized only up to the portion of the joint revenue to which we are entitled. We therefore record an obligation to pay hub partners under our trade payables when we receive payments of monthly tuition fees from students.
Taxes deducted from gross revenue
Revenues, expenses and assets are recognized net of sales tax, except:
|·||when the sales taxes incurred on the purchase of goods or services are not recoverable from tax authorities, in which case the sales tax is recognized as part of the cost of acquiring the asset or expense item, as applicable; and|
|·||when the amounts receivable or payable are stated with the amount of sales taxes included.|
The net amount of sales taxes, recoverable or payable to the tax authority, is included as part of receivables or payables in the statement of financial position, and net of corresponding revenue or cost/expense, in our statement of profit or loss.
Sales revenues in Brazil are subject to taxes and contributions, at the following statutory rates:
|·||The PIS and the COFINS are contributions levied by the Brazilian federal government on gross revenues. These amounts are invoiced to and collected from our customers. Given that we are acting as tax withholding agents on behalf of the tax authorities, these amounts are recognized as deductions to gross revenue against tax liabilities. PIS and COFINS paid on certain purchases may be claimed back as tax credits to offset amounts of PIS and COFINS which are payable. These amounts are recognized as recoverable taxes and are offset on a monthly basis against taxes payable and presented net, as the amounts are due to the same tax authority.|
|·||PIS and COFINS are contributions calculated on two different regimes pursuant to the applicable Brazilian tax legislation: cumulative method and non-cumulative method. The regulations applicable to PROUNI provide that the revenue from traditional and technical undergraduate courses are exempt from PIS and COFINS. For income from other teaching activities, PIS and COFINS are charged based on the cumulative method at rates of 0.65% and 3.00%, respectively, and for non-teaching activities, PIS and COFINS are charged based on the non-cumulative method at rate of 1.65% and 7.6%, respectively.|
|·||ISS is a tax levied by municipalities on revenues from the provision of services. ISS tax is added to amounts invoiced to our customers for the services we render. Given that we are acting as an agent collecting these taxes on behalf of municipal governments, these are recognized as deductions to gross revenue against tax liabilities. The applicable rates may vary from 2.00% to 5.00%.|
|·||INSS is a social security charge levied on wages paid to employees.|
Cost of services rendered
Cost of sales consist primarily of expenses related to services of providing classes and delivering our content and technology to our students, which are mainly composed of payroll, depreciation and amortization, print expenses, freight, leases, utilities, cleaning, security and maintenance of our hubs.
Costs of services rendered amounted to 45.9% and 48.0% of net revenue in the years ended December 31, 2019 and 2018, respectively.
We classify our operating expenses as selling expenses, general and administrative expenses, net impairment losses on financial assets and other income and expenses. The largest component of our operating expenses is employee and labor-related expenses, which includes salaries and bonuses and employee benefit expenses.
Selling expenses. Selling expenses consist of primarily expenses with personnel related to sales and marketing activities, marketing and sales expenses, as well as expenses with commercial consultants and projects.
General and administrative expenses. General and administrative expenses consist of personnel expenses related to general and administrative activities, depreciation and amortization, leases, consulting and advisory services, leases, contingencies and maintenance of our corporate offices.
Net impairment losses on financial assets. Net impairment losses on financial assets expenses consist of provision for losses, effective losses and recovery on receivables. The allowance for expected credit losses of trade receivables are calculated on a monthly basis by analyzing the amounts invoiced in the month, the monthly volume of receivables and the respective outstanding amounts by late payment range, calculating the recovery performance. When the delay of receivables exceeds 365 days, the receivable is written down. Collection efforts continue even for written-off receivables and their receipt is recognized directly in the statement of profit or loss, when incurred, as recovery of losses.
Other expenses. The other expenses are contractual indemnities (such as insurance policies reimbursements), deductible donations and miscellaneous income and/or expense items.
Financial income (expenses)
Our financial income consists of interest on tuition fees paid in arrears and the financial investments yield. The interest on tuition fees paid in arrears is recognized based on the time elapsed, using the effective interest rate method. This financial income is calculated using the same effective interest rate used to calculate the recoverable amount, that is, the original rate of trade receivables.
Financial expenses include interest expenses on taxes payable in installments and other financial liabilities, including the interest accrued on accounts payable from the acquisition of subsidiaries and on lease liabilities.
The postsecondary education companies which we maintain are part of the PROUNI program. PROUNI provides, through Law No. 11,096, of January 13, 2005, exemption of certain federal taxes imposed to postsecondary institutions that grant scholarships to low-income students enrolled in undergraduate courses and technology graduate courses. The following federal taxes are included in the exemption: IRPJ, CSLL, PIS and COFINS.
For additional information on PROUNI, see “Regulatory Overview—Financing Alternatives for Students: Incentive Programs—University for All Program (PROUNI).”
Current income taxes
Income taxes in Brazil consist of IRPJ and CSLL (which are social contribution taxes). According to Brazilian tax law, income taxes and social contribution are assessed and paid by each legal entity and not on a consolidated basis. The income tax payable by each entity is calculated based on the entity’s income, adjusted based on certain additions and exclusions provided for in the applicable legislation.
Current income taxes were calculated based on the criteria established in a normative instruction issued by the Brazilian internal revenue service (Receita Federal do Brasil) in relation to the PROUNI program. Current income tax assets and liabilities are measured at the amount expected to be recovered from or paid to the tax authorities. The tax rates and tax laws used to compute the amount are those that are enacted or substantively enacted at the reporting date. We periodically evaluate positions taken in the tax returns with respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
Deferred income taxes
Deferred income tax and social contribution are recognized on temporary differences between the tax bases of assets and liabilities and their carrying amounts in the financial statements. We apply the liability method. However, deferred taxes are not accounted for if they arise from the initial recognition of an asset or liability in a transaction other than a business combination which, at the time of the transaction, does not affect accounting nor taxable profit or loss.
Deferred tax assets are recognized only to the extent that it is probable that future taxable profit against which the temporary differences and/or tax losses may be utilized will be available. Pursuant to Brazilian tax legislation, loss carry forwards can be used to offset up to 30% of taxable profit for the year and do not expire.
Deferred tax is provided on temporary differences arising on investments in subsidiaries, except for a deferred tax liability where the timing of the reversal of the temporary difference is controlled by us and it is probable that the temporary difference will not reverse in the foreseeable future.
Deferred tax assets and liabilities are presented net in the statement of financial position when there is a legally enforceable right and the intention to offset them upon the calculation of current taxes. This generally occurs when the relevant assets and liabilities relate to the same legal entity and the same jurisdiction. Accordingly, deferred tax assets and liabilities in different entities or in different jurisdictions are generally presented separately, and not on a net basis.
Results of Operations
Year Ended December 31, 2019 Compared to the Year ended December 31, 2018
The following table sets forth our income statement data for the years ended December 31, 2019 and 2018:
|For the Years Ended December 31,|
|(in R$ millions, except percentages)|
|Statement of Profit or Loss Data:|
|Revenue from distance-learning undergraduate courses||336.3||259.6||29.5%|
|Revenue from continuing education courses||47.1||33.0||42.7%|
|Revenue from on-campus undergraduate courses||77.6||90.8||(14.5)%|
|Cost of services rendered||(211.5||)||(184.2||)||14.8%|
|General and administrative expenses||(125.3||)||(90.7||)||38.1%|
|Net impairment losses on financial assets||(58.2||)||(44.6||)||30.5%|
|Net impairment losses on financial assets from distance-learning undergraduate courses||(43.7||)||(31.9||)||37.0%|
|Net impairment losses on financial assets from continuing education courses||(4.0||)||(3.7||)||8.1%|
|Net impairment losses on financial assets from on-campus undergraduate courses||(10.5||)||(9.0||)||16.7%|
|Other income (expenses), net||(0.9||)||(1.0||)||(10.0)%|
|Operating profit (loss)||(35.9||)||(7.6||)||372.4%|
|Loss before taxes||(77.1||)||(50.2||)||53.6%|
|Current income taxes||(14.8||)||(10.6||)||39.6%|
|Deferred income taxes||25.7||15.7||63.7%|
|Loss for the year||(66.2||)||(45.2||)||46.5%|
|(1)||Amounts have been restated as a result of the full retrospective method of adoption of IFRS 16 with the date of initial application of January 1, 2019. For more information, see note 2.6 to our audited consolidated financial statements included elsewhere in this prospectus.|
Net revenue for the year ended December 31, 2019 was R$461.1 million, an increase of R$77.7 million, or 20.3%, from R$383.4 million for the year ended December 31, 2018. This increase was attributable an increase in net revenue from distance-learning undergraduate courses and continuing education courses, which was offset by a decrease in revenue from on-campus undergraduate courses:
Revenue from distance-learning undergraduate courses. Revenue from distance-learning undergraduate courses for the year ended December 31, 2019 was R$336.3 million, an increase of R$76.7 million, or 29.5%, from R$259.6 million for the year ended December 31, 2018. This increase was primarily attributable to the 31.5% increase in the number of students enrolled in our distance-learning undergraduate courses, from 148,711 enrolled students in 2018 to 195,613 enrolled students in 2019, as a result of the increase in the number of operational hubs during the period, from 370 operational hubs in 2018 to 545 operational hubs in 2019, and the maturation of hubs.
Revenue from continuing education courses. Revenue from continuing education courses for the year ended December 31, 2019 was R$47.1 million, an increase of R$14.1 million, or 42.7%, from R$33.0 million for the year ended December 31, 2018. This increase was primarily attributable to the 18.9% increase in number of students enrolled in our distance-learning graduate courses, from 30,227 enrolled students in 2018 to 35,952 enrolled students in 2019, as a result of the increase in the number of hubs offering distance learning graduate courses and the increase in the number of distance learning graduate courses offered.
Revenue from on-campus undergraduate courses. Revenue from on-campus undergraduate courses for the year ended December 31, 2019 was R$77.6 million, a decrease of R$13.2 million, or 14.5%, from R$90.8 million for the year ended December 31, 2018. This decrease was primarily attributable to the decrease in number of enrolled students, as a result of the increased penetration of distance learning course alternatives.
Cost of services rendered
Cost of services rendered for the year ended December 31, 2019 was R$211.5 million, an increase of R$27.3 million, or 14.8%, from R$184.2 million for the year ended December 31, 2018. This increase was primarily attributable to the increase of our enrolled student base. On a relative basis, the 14.8% increase in cost of services in 2019 was lower than the 20.3% increase in net revenue during the period. Accordingly, our gross margin (defined as gross profit divided by net revenue) increased from 52.0% in 2018 to 54.1% to 2019, as a result of cost-saving initiatives, particularly the cost restructuring of the academic delivery process by our on-site tutors and employee dismissals in connection with organizational and academic restructurings.
As a result of the foregoing, gross profit for the year ended December 31, 2019 was R$249.5 million, an increase of R$50.2 million, or 25.2%, from R$199.3 million for the year ended December 31, 2018.
Operating expenses for the year ended December 31, 2019 was R$285.4 million, an increase of R$78.5 million, or 37.9%, from R$206.9 million for the year ended December 31, 2018. This increase was attributable to the following:
Selling expenses. Selling expenses for the year ended December 31, 2019 amounted to R$100.9 million, an increase of R$30.3 million, or 42.9%, from R$70.6 million for the year ended December 31, 2018. This increase was primarily attributable to higher marketing expenses, which increased by R$17.4 million (mainly comprised by R$14.2 million in on-line advertisements, R$1.3 million in advertisements broadcast on open television and R$1.1 million in agency fees). This increase was a result of the anticipation to December 2019 of marketing expenses (mainly digital marketing) that are typically incurred in January of each year in order to preempt the actions of our competitors and maximize the efficiency of our intake process. Additionally in 2019, there was an increase in the impairment totaling R$7.6 million relating to customer relationships in the on-campus segment (for more information, see note 15 to our audited consolidated financial statements included elsewhere in this prospectus). There was also an increase in payroll totaling R$5.2 million, attributable to the increase in the employee headcount in our hubs as a result of the increase in the number of enrolled students and the insourcing of certain services we historically outsourced.
Net impairment losses on financial assets. Net impairment losses on financial assets for the year ended December 31, 2019 was R$58.2 million, an increase of R$13.6 million, or 30.5%, from R$44.6 million for the year ended December 31, 2018. On a relative basis, the margin of net impairment losses on financial assets increased from 11.6% of net revenues in 2018 to 12.6% of net revenue in 2019. This increase was attributable to an increase in net impairment losses from distance-learning undergraduate courses, continuing education courses and on-campus undergraduate courses:
Net impairment losses on financial assets from distance-learning undergraduate courses. Net impairment losses on financial assets from distance-learning undergraduate courses for the year ended December 31, 2019 was R$43.7 million, an increase of R$11.8 million, or 37.0%, from R$31.9 million for the year ended December 31, 2018, as a result of the increase in the estimated credit losses of our trade receivables. Trade receivables increased year-over-year as a result of an increase in our revenues and the number of student enrollments, which led to higher losses on outstanding receivables.
Net impairment losses on financial assets from continuing education courses. Net impairment losses on financial assets from continuing education courses for the year ended December 31, 2019 was R$4.0 million, an increase of R$0.3 million, or 8.1%, from R$3.7 million for the year ended December 31, 2018, as a result of the increase in the estimated credit losses of our trade receivables. Trade receivables increased year-over-year as a result of an increase in our revenues and the number of student enrollments, which led to higher losses on outstanding receivables.
Net impairment losses on financial assets from on-campus undergraduate courses. Net impairment losses on financial assets from on-campus undergraduate courses for the year ended December 31, 2019 was R$10.5 million, an increase of R$1.5 million, or 16.7%, from R$9.0 million for the year ended December 31, 2018. This increase was primarily attributable to certain receivables related to a student financing program that was discontinued in 2016 and which were also written-off.
General and administrative expenses. General and administrative expenses for the year ended December 31, 2019 was R$125.3 million, an increase of R$34.6 million, or 38.1%, from R$90.7 million for the year ended December 31, 2018. This increase was primarily attributable to: (i) the expense with our share option plan, which amounted to R$26.4 million for the year ended December 31, 2019 and R$7.5 million for the year ended December 31, 2018, representing an increase of R$18.9 million, upon vesting of options granted; (ii) the recognition of impairment losses of R$43.2 million and R$33.4 million in the years ended December 31, 2019 and 2018, respectively, representing an increase of R$9.8 million, which relates to the on-campus undergraduate courses
segment, and is mainly due to decrease in the average monthly tuition fee per student recorded in 2019 and an increase in the number of students that are migrating to distance learning courses, which is also in line with changes in our strategy to focus on distance learning and recent decision by our management to dispose of on-campus units with lower performance; and (iii) personnel expenses, which amounted to R$22.6 million for the year ended December 31, 2019 and R$17.2 million for the year ended December 31, 2018, representing an increase of R$5.4 million, as a result of the relocation of our headquarters to the city of Florianopolis in the state of Santa Catarina, and the increase in our employee headcount, in anticipation of this offering.
Other income (expenses), net. Other income (expenses), net for the year ended December 31, 2019 was R$0.9 million, a decrease of R$0.1 million, or 10.0%, from R$1.0 million for the year ended December 31, 2018. This decrease was primarily attributable to a R$0.1 million decrease in contractual indemnity payments during the period.
As a result of the foregoing, operating loss increased 372.4%, or R$28.3 million, to R$35.9 million for the year ended December 31, 2019 from R$7.6 million for the year ended December 31, 2018.
Financial results for the year ended December 31, 2019 was an expense of R$41.2 million, a decrease of R$1.4 million, or 3.3%, from an expense of R$42.6 million for the year ended December 31, 2018. This decrease was primarily attributable to the decrease in both our financial expense and financial income, as follows:
Financial income. Financial income for the year ended December 31, 2019 was R$19.2 million, a decrease of R$2.8 million, or 12.7%, from R$22.0 million for the year ended December 31, 2018. This decrease was primarily attributable to a R$1.9 million decrease in financial investment yield during the period primarily as a result of the reduction in the rates of return on investments.
Financial expenses. Financial expenses for the year ended December 31, 2019 was R$60.4 million, a decrease of R$4.2 million, or 6.5%, from R$64.6 million for the year ended December 31, 2018. This decrease was primarily attributable to a reduction in our indebtedness.
Loss before taxes
As a result of the foregoing, loss before taxes for the year ended December 31, 2019 was R$77.1 million, an increase of R$26.9 million, or 53.6%, from R$50.2 million for the year ended December 31, 2018.
Income taxes for the year ended December 31, 2019 was a credit of R$10.9 million, an increase of R$5.9 million, or 118.0%, from a credit of R$5.0 million for the year ended December 31, 2018. This increase was primarily attributable to the following:
Current income taxes. Current income taxes for the year ended December 31, 2019 was an expense of R$14.8 million, an increase of R$4.2 million, or 39.6%, from an expense of R$10.6 million for the year ended December 31, 2018. This increase was primarily attributable the increase of the taxable profit, due to the significant increase in the earnings from our continuing education segment (which does not benefit from any tax benefits), as a result of the increase in number of enrolled students and hubs during the period.
Deferred income taxes. Deferred income taxes for the year ended December 31, 2019 was a credit of R$25.7 million, an increase of R$10.0 million, or 63.7%, from a credit of R$15.7 million for the year ended December 31, 2018. This decrease was primarily attributable to the reduction on temporary differences mainly as a result of the amortization of intangible assets on business combinations.
Loss for the year
As a result of the foregoing, loss for the year ended December 31, 2019 was R$66.2 million, an increase of R$21.0 million, from a loss of R$45.2 million for the year ended December 31, 2018.
Liquidity and Capital Resources
As of December 31, 2019, we had R$74.8 million in cash and cash equivalents and financial investments. We believe that our current available cash and cash equivalents and short-term investments and the cash flows from our operating activities will be sufficient to meet our working capital requirements and capital expenditures in the ordinary course of business for the next 12 months.
The following table shows the generation and use of cash in the years ended December 31, 2019 and 2018.
|For the Year Ended December 31,|
|(in R$ millions)|
|Cash Flow Data|
|Cash flows provided by operating activities||56.0||50.2|
|Cash flows used in investing activities||(49.5||)||(158.8||)|
|Cash flows provided by (used in) financing activities||(6.5||)||108.7|
Out net cash flows from operating activities increased by 11.6% from R$50.2 million in 2018 to R$56.0 million in 2019, as a result of the following variations. Our loss before taxes increased to R$77.1 million in 2019 from R$50.2 million in 2018. The adjustments to reconcile income before taxes to cash provided by operating activities increased from R$212.4 million in 2018 to R$267.7 million in 2019, as a result of the impairment of fair value adjustment on intangibles related to business combinations (for more information, see note 15 to our audited consolidated financial statements included elsewhere in this prospectus) and an increase of R$18.9 million in share-based compensation. Changes in our operating assets and liabilities were principally affected by: (1) a R$101.3 million increase in trade receivables in 2019 compared to a R$70.9 million increase in trade receivables in 2018, primarily as a result of the increase of enrolled students and the expansion of our operations in cities with lower credit quality; and (2) a R$13.9 million increase in trade payables in 2019 compared to a R$0.9 million increase in trade payable in 2018 as a result of the anticipation of marketing expenses to December 2019 from the originally scheduled early 2020.
Our net cash flows used in investing activities decreased by 68.8%, from R$158.8 million in 2018 to R$49.5 million in 2019, primarily due to our recording proceeds from short-term investments, net of R$103.2 million in 2019 compared to acquisitions of short-term investments, net of R$6.6 million in 2018 and a R$9.3 million decrease in payments for the acquisition of interests in subsidiaries during the years compared. In addition, we recorded increases of R$5.3 million and R$4.5 million in purchases of property and equipment and purchases and capitalization of intangible assets, as further described below in “—Capital Expenditures.”
We recorded net cash from financing activities of R$108.7 million in 2018 compared to net cash used in financing activities of R$6.5 million in 2019, primarily due to capital contributions of R$112.5 million in 2018 which exceeded the capital contributions in 2019 which amounted to R$1.9 million. For further information, see note 19 to our audited consolidated financial statements included elsewhere in this prospectus.
As of December 31, 2019, our total consolidated indebtedness was R$482.7 million, of which R$379.5 million are accounts payable from the acquisition of subsidiaries, and R$103.2 million are lease liabilities.
We completed the acquisitions of our subsidiaries in 2016 and 2017. The remaining purchase price is payable annually through 2022 (bearing interest at its original effective interest rate and as further adjusted by IPCA inflation rate). The subsidiaries, all of which we acquired from the Kroton group, are: Sociedade Educacional Leonardo da Vinci S/S Ltda., Sociedade Educacional do Vale do Itapocu S.S. Ltda., FAIR and FAC/FAMAT.
For further information about our indebtedness, see notes 13 and 17 to our audited consolidated financial statements included elsewhere in this prospectus.
In the years ended December 31, 2019 and 2018, we made capital expenditures of R$44.6 million and R$35.0 million, respectively. These capital expenditures mainly include expenditures related to the purchase of property and equipment and the purchase and capitalization of intangible assets.
Our capital expenditures in 2019 totaled R$12.8 million for internal project development, R$9.5 million for furniture, equipment and facilities, R$9.0 million for refurbishments related to the accessibility and modernization of certain of our facilities, R$5.3 million for IT equipment, R$4.6 million for improvements in leased properties and R$3.4 million for software acquisitions.
Our capital expenditures in 2018 totaled R$10.2 million for internal project development, R$8.8 million for furniture, equipment and facilities, R$8.3 million for refurbishments related to the accessibility and modernization of certain of our facilities, R$3.9 million for IT equipment, R$2.2 million for improvements in leased properties and R$1.6 million for software acquisitions.
Tabular Disclosure of Contractual Obligations
The following is a summary of our contractual obligations as of December 31, 2019:
|Payments Due By Period|
|Less than 1 year||1-3 years||3-5 years||More than 5 years||Total|
|(in thousands of reais)|
|Other leases (1)||2,804||1,402||1,038||402||5,646|
|Prepayments from customers||3,186||—||—||—||3,186|
|Accounts payable from acquisition of subsidiaries||135,233||281,022||—||—||416,255|
|(1)||Refers to commitments from lease agreements that fall into the exemptions of short-term leases and low-value assets and therefore not recognized in lease liabilities.|
Off-Balance Sheet Arrangements
As of December 31, 2019, we did not have any off-balance sheet arrangements.
Critical Accounting Estimates and Judgments
Our consolidated financial statements are prepared in accordance with IFRS. In preparing our audited consolidated financial statements, we make assumptions, judgments and estimates that can have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments and estimates. Our significant accounting policies are described in note 2 to our audited consolidated financial statements included elsewhere in this prospectus. We believe that the following critical accounting policies are more affected by the significant judgments and estimates used in the preparation of our consolidated financial statements.
Impairment of non-financial assets
Impairment exists when the carrying value of an asset or cash generating unit, or CGU, or group of CGUs exceeds its recoverable amount, defined as the higher of its fair value less costs of disposal and its value in use. The fair value less costs of disposal calculation is based on data available from binding sales transactions, conducted at arm’s length, for similar assets or observable market prices less incremental costs of disposing of the asset. The value in use calculation is based on a discounted cash flow model, or the DCF model. The cash flows are derived from the budget for the next five years and do not include restructuring activities to which we have not yet committed or significant future investments that will enhance the performance of the assets of the CGU being tested. The recoverable amount is sensitive to the discount rate used for the DCF model as well as to expected future cash-inflows and the growth rate used for extrapolation purposes.
These estimates are most relevant to our goodwill and the indefinite lives of intangible assets. The key assumptions used to determine the recoverable amount for each CGU, including a sensitivity analysis, are disclosed and further explained in note 15 to our audited consolidated financial statements included elsewhere in this prospectus.
Fair value measurement of financial instruments
When the fair values of financial assets and financial liabilities recorded in our statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques. The inputs into these models are taken from observable markets where possible, but where this is not feasible, a degree of judgement is required to estimate fair values. Judgements include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments. For more information, see note 5.4 to our audited consolidated financial statements included elsewhere in this prospectus.
Credit losses on trade receivables
We recognize an allowance for expected credit losses, or ECLs, for trade receivables applying a simplified approach in calculating ECLs. As a result, we do not track changes in credit risk, but rather recognize an allowance for doubtful accounts based on lifetime ECLs at each reporting date. We have established a provision matrix that is based on our historical credit losses, adjusted for forward looking factors specific to the debtors and the economic environment. We consider a trade receivable to be in default when contractual payments are 365 days past due. In certain cases, however, we may also consider a financial asset to be in default when internal or external information indicates that we are unlikely to receive the outstanding contractual amounts in full before taking into account any credit enhancements held by us. A trade receivable is written off when there is no reasonable expectation of recovering the contractual cash flows. The information about our allowance for expected credit losses is disclosed in note 9 to our audited consolidated financial statements included elsewhere in this prospectus.
Provision for contingencies
We are a party to proceedings at judicial and administrative levels, as disclosed in note 18 to our audited consolidated financial statements included elsewhere in this prospectus. The provision for legal proceedings is set up for all proceedings assessed as probable losses. The likelihood of loss is assessed based on available evidence, the hierarchy of laws, case law, most recent court decisions and their the relevance within the legal system and the assessment made by the outside legal counsel. Provisions are reviewed and adjusted to take into account changes in circumstances, such as statute of limitations, additional exposures identified based on new matters or court decisions.
Lease term of contracts with renewal options
We determine the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.
We have the option, under some of our leases to lease the assets for additional terms. We apply judgements in evaluating whether it is reasonably certain to exercise the option to renew. That is, we consider all relevant factors that create an economic incentive for us to exercise the renewal. After the commencement date, we reassess the
lease term if there is a significant event or change in circumstances that is within our control and affects our ability to exercise (or not to exercise) the option to renew (for example, a change in business strategy).
Incremental lease rate
We are unable to determine the implicit discount rate to be applied to our lease agreements. Therefore, the incremental rate on the lessee’s loan is used to calculate the present value of the lease liabilities at the initial registration of the lease.
The lessee’s incremental loan rate is the interest rate that the lessee would have to pay when borrowing funds for the acquisition of an asset similar to the asset object of the lease, for a similar term and with a similar guarantee, the funds required to obtain the asset with a value similar to the right of use asset in a similar economic environment.
Obtaining this rate involves a high degree of judgment and should be a function of the lessee’s credit risk, the term of the lease, the nature and quality of the collateral offered and the economic environment in which the transaction takes place. The rate calculation process preferably uses readily observable information from which to make the necessary adjustments to arrive at its incremental lending rate.
IFRS 16 allows the incremental rate to be determined for a group of agreements when such agreements have similar characteristics.
We have adopted the aforementioned practical method of determining groupings for our lease agreements as we understand that the effects of a grouped application do not materially differ from the application to individual leases. The size and composition of the portfolios were defined according to the following assumptions: (1) assets of a similar nature; and (2) remaining maturities with respect to the similar initial application date.
Estimating fair value for share-based payment transactions requires determination of the most appropriate valuation model and underlying assumptions, which depends on the terms and conditions of the grant and the information available at the grant date and at each reporting period, for the liability portion on cash-settled transactions.
We use certain methodologies to estimate fair value which include the following:
|·||estimation of fair value based on equity transactions with third parties close to the grant date; and|
|·||other valuation techniques including option pricing models such as Black-Scholes.|
These estimates also require determination of the most appropriate inputs to the valuation models including assumptions regarding the expected life of a share option, expected volatility of the price of our shares and expected dividend yield.
Recent Accounting Pronouncements
We have applied the following standards and amendments for the first time in our annual reporting period commencing January 1, 2019:
|·||IFRS 16 – Leases;|
|·||IFRIC Interpretation 23 – Uncertainty over Income Tax Treatments;|
|·||Amendments to IFRS 9 – Prepayment Features with Negative Compensation;|
|·||Amendments to IAS 19 – Plan Amendment, Curtailment or Settlement; and|
|·||Annual Improvements to IFRS Standards 2015 – 2017 Cycle.|
We changed our accounting policies as a result of adopting IFRS 16. A lessee can apply IFRS 16 either by a full retrospective approach or a modified retrospective approach. We applied the full retrospective transition approach to each prior reporting period presented. Under the full retrospective method, our comparative information was restated.
The other amendments listed above did not have any impact on the amounts recognized in prior periods and are not expected to significantly affect our current or future reporting periods.
IFRS 16 – Leases
IFRS 16 superseded IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases – Incentives and SIC – 27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single methodology on their balance sheet, similar to accounting for finance leases under IAS 17.
In our transition to IFRS 16, we elected to use the practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. We also elected to use the recognition exemptions for leases that, at the commencement date, have a term of 12 months or less and do not contain a purchase option, or short-term leases, and lease contracts for which the underlying asset is of low value, or low-value assets, and the lessee must recognize the lease payments associated with such leases as an expense on either a straight-line basis over the term of the lease or another systematic basis if that basis is representative of the pattern of the lessee’s benefits, similar to the previous standard for operating leases under IAS 17.
Our leases mainly for the right of us to properties where our campuses and proprietary hubs are located, as well as certain equipment (personal computers, printing and photocopying machines and communicating equipment) that are considered low value. Before the adoption of IFRS 16, we classified each of our leases (as lessee) at the commencement date as either a financial lease or an operating lease. We did not have financial leases as of December 31, 2018. In an operating lease, the leased properties and equipment were not capitalized, and the lease payments were recognized as a rental expense in our statement of profit or loss on a straight-line basis over the term of the lease.
We adopted IFRS 16 using the full retrospective method with the date of initial application being January 1, 2019. Under this method, we adjusted the opening balance of each affected component of equity for the earliest prior period presented and the other comparative amounts disclosed for each prior period presented as if the new accounting policy was already applied. As a result, we prepared a full retrospective restatement applying IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors, except for our short-term leases and leases of low-value assets.
A summary of our accounting policy upon adoption of IFRS 16 is described in note 2.5.f to our audited consolidated financial statements included elsewhere in this prospectus.
For a reconciliation of our restatement of financial information for comparative purposes in connection with our adoption of IFRS 16, see note 2.6 to our audited consolidated financial statements included elsewhere in this prospectus.
IFRIC Interpretation 23 – Uncertainty over Income Tax Treatment
This interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 – Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. This interpretation specifically addresses the following:
|·||whether an entity considers uncertain tax treatments separately;|
|·||the assumptions an entity makes about the examination of tax treatments by taxation authorities;|
|·||how an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates; and|
|·||how an entity considers changes in facts and circumstances.|
An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that best predicts a resolution to the uncertainty in question must be followed.
Our application of this interpretation did not have material impact on our consolidated financial statements.
New standards and interpretations not yet adopted
We have not early adopted certain new accounting standards and interpretations have been published that are not mandatory for December 31, 2019. These standards are not expected to have a material impact on our financial statements in current or future reporting periods and on our foreseeable future transactions.
We are an emerging growth company under the JOBS Act. The JOBS Act provides that an emerging growth company can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have irrevocably elected not to avail ourselves of this exemption and, therefore, we will be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies.
Subject to certain conditions set forth in the JOBS Act, if, as an “emerging growth company,” we choose to rely on such exemptions we may not be required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the CEO’s compensation to median employee compensation. These exemptions will apply for a period of five years following the completion of our initial public offering or until we are no longer an “emerging growth company,” whichever is earlier.
Quantitative and Qualitative Disclosure About Market Risk
We are exposed to market risks in the ordinary course of our business, including the effects of interest rate changes. Information relating to quantitative and qualitative disclosures about these market risks is described below.
Interest Rate Risk
Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. Our exposure to the risk of changes in market interest rates relates primarily to our short-term investments and accounts payable from acquisition of subsidiaries, subject in each case to variable interest rates, principally the Brazilian interbank deposit CDI rate and IPCA inflation rate.
The following table demonstrates the sensitivity to a reasonably possible change in interest rates on short-term investments and accounts payable from acquisition of subsidiaries. With all variables held constant, our income before income taxes is affected through the impact on floating interest rate, as follows:
|Increase/decrease in interest rate|
|(in thousands of reais, unless otherwise indicated)|
|Short-term investments||72,321||99.10% CDI + 5.81%||4,202||Decrease||3,151||1,050|
|Accounts payable from acquisition of subsidiaries||379,540||IPCA + 4.31%||16,358||Increase||20,448||28,627|
In the table above, the probable scenario reflects the closing rates of the fixed interest yield and inflation indices at year-end. The possible scenario projects a variation (a decrease in CDI and an increase in IPCA) of 25% in these rates and the remote scenario projects a variation of 75%, including both increases and decreases in each case, which are considered to be the largest hypothetical losses resulting from this risk factor.
Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. Credit risk arises from our exposure to third parties, including cash and cash equivalents and short-term investments, as well as from its operating activities, primarily related to trade receivables from customers.
Customer credit risk is managed by us based on the established policy, procedures and control relating to customer credit risk management. Outstanding customer receivables are regularly monitored. See Note 8 to our audited consolidated financial statements for additional information on our trade receivables.
Credit risk from balances with banks and financial institutions is managed by our treasury department in accordance with our policy. Investments of surplus funds are made only with approved counterparties and within limits assigned to each counterparty.
Our maximum exposure to credit risk for the components of the statement of financial position as of December 31, 2019 and 2018 is the carrying amounts of our financial assets.
Our management has responsibility for monitor liquidity risk. In order to achieve the our objective, management regularly reviews the risk and maintains appropriate reserves, including bank credit facilities with first tier financial institutions. Management also continuously monitors projected and actual cash flows and the combination of the maturity profiles of the financial assets and liabilities.
The main requirements for financial resources used by us arise from the need to make payments for suppliers, operating expenses, labor and social obligations and accounts payable from acquisition of subsidiaries.
See “—Liquidity and Capital Resources” and “—Tabular Disclosure of Contractual Obligations.”
Foreign Exchange Risk
Our results are not subject to significant fluctuations resulting from the effects of the volatility of any exchange rate.
Introduction to Brazil’s Postsecondary Education
Overview of Brazilian Postsecondary Education Framework
Education is a priority for Brazilians, irrespective of their age or income. It is viewed as a stepping stone into the job market, and as one of the most important decisions for parents to make with respect to their child’s development as well as for working adults wishing to progress their careers.
In Brazil, the education cycle begins with primary and secondary education, also known as K-12, with a student base of almost 48 million students. Primary and secondary education is mostly provided by public schools, which account for 81% of total students enrolled as of December 31, 2018 according to the MEC. Private institutions generally lead quality rankings, and there is significant variation in quality across public schools as a result of the different investments made by municipalities, states, or the Brazilian federal government based on results in the National Secondary Education Examination (Exame Nacional do Ensino Médio), or ENEM.
Postsecondary education is divided into undergraduate and graduate degrees. Undergraduate courses generally cater to incoming secondary school students. Graduate degrees encompass post-graduate, master’s and doctoral degrees. Institutions are classified as colleges, university centers or universities, depending on the courses offered, the level of education of faculty members and the autonomy granted to them by the MEC. There are three types of undergraduate degrees in Brazil: bachelor’s, licenses and technical degrees. These undergraduate degrees have flexible curricular schedules. Bachelor’s degrees typically have a duration three to six years and are designed to provide students with solid theoretical understanding of their subject matter and prepare them for their desired professions. License degrees are focused on training K-12 and secondary school teachers, and have a duration of three to five years. Technical degrees provide more focused training and typically last two to three years. Graduate degrees focus on deepening students’ understanding of their selected subject. There has been significant growth of lato sensu graduate degrees in Brazil. Post-graduate degrees, which also include master of business administration degrees, are more focused on preparing students for a specific profession and are typically provided over a total of 360 hours.
Postsecondary education in Brazil is provided in two formats:
|·||On-Campus: This format is based on face-to-face interactions with students, although, pursuant to the applicable regulatory standards, up to 40% of the content of these courses may be provided in a digital format to complement face-to-face interactions (this applies to all private and public postsecondary courses, except for medical courses); and|
|·||Distance Learning: In this format, course delivery is primarily made in a digital format, which may be complemented by physical and online tutoring and support classes offered to students.|
Postsecondary education students in Brazil have been facing several challenges, including (1) high tuition fees with few financing alternatives, (2) long commutes, (3) lack of access to continuously available resources for studying, (4) teachers, tutors and materials which fail to engage students, and (5) poor support and student experience.
Given the limited and less-efficient nature of public postsecondary education, private education institutions have gained market share in Brazil through a combination of significant investments, more efficient learning models, and by enrolling new postsecondary education students into the system. Nevertheless, private education institutions charge fees. The tuition fees vary based on subject, price positioning and teaching format (on-campus and distance learning).
Postsecondary Education Market in Brazil
According to INEP and UNESCO, with 6.2 million students as of 2017, Brazil ranks as the third largest private postsecondary education market in the world, only behind India and China. Moreover, we believe Brazil has strong growth potential as a result of low penetration rates and increases in disposable income. Brazil has one of the lowest postsecondary education gross enrollment rates in the world, at only 35% in 2017, as compared to 88% for the United States and 94% for South Korea, according to UNESCO.
Brazil Is One of the Largest Private
Postsecondary Education Markets Globally
Private Postsecondary Education Enrollments in Millions (2017), Gross Enrollment Ratio (2017)
Source: OECD, UNESCO, MEC
Note: In 2018, there were 6.4 million students in Brazil.
It is expected that the penetration rate of private postsecondary education will continue to increase in the coming years, while the available seats in public universities are expected to remain limited given the lack of investments in this area by the Brazilian government. In addition, we note that the cost per student in public education is significantly higher than in private education, which demonstrates a more efficient private sector in this regard.
In 2014, the Brazilian federal government established a PNE with 20 goals for improving and enhancing access to education, which is expected to be completed by 2024. Out of the 20 goals, the most important goal for the postsecondary education sector is to increase the penetration rate of postsecondary education to 50.0% of the target population (i.e., 18 to 24 years old) as compared to 30.3% in 2018. To reach this rate, the Brazilian government has enacted market friendly regulations to promote distance learning courses, mainly due to the affordability of these courses.
In 2018, there were 8.5 million students enrolled in private and public postsecondary courses in Brazil (6.4 million in the private sector and 2.1 million in the public sector), with private education accounting for 76% of total enrollments according to the MEC. The 3.7% CAGR in the number of students enrolled since 2008 was mainly driven by the private sector, which has grown at a pace 1.5 times faster than the public sector since 2008, as a result of (i) the increasing adoption of distance learning and (ii) governmental programs and incentives, such as the PROUNI and FIES.
Total Undergraduate Enrollments
In the private education segment, in which there have been over 5,000 new courses offered in the last five years, the increase in distance learning has been the driver behind the expansion of the student base and increasing penetration, which currently stands at 29.4% of the overall private offering, a 19% increase in comparison to 10.5% in 2008. According to INEP, distance learning expanded at a CAGR of 15.4% between 2008 and 2018, significantly greater than the CAGR of 1.7% for on-campus education in the same period.
Private Undergraduate Enrollments
Distance learning courses have resulted in above-market performance over the past ten years, with a consistent increase in new undergraduate enrollments. While distance learning penetration in 2008 was only 17% of overall private undergraduate intakes, it stood at almost 46% of new students in 2018 following growth at a CAGR of 18.2% in the period and is expected to surpass annual on-campus enrollments, which have been almost flat in the last few years.
Private Undergraduate Intakes
This trend is even more pronounced in post-graduate courses, which exhibited 50% annual growth over the last two years according to Semesp. Post-graduate courses are offered by approximately two thousand institutions, of which 91% are private, to 1.2 million students (a student base which is almost double the size of what it was three years ago). Despite still being the preferred choice for many students, the on-campus segment has been losing market share. The number of students enrolled in distance learning courses increased by 125% from 2016 to 2018, by which time students enrolled in distance learning courses accounted for one third of the student population.
Number of Students Enrolled in Lato
Sensu Post-Graduation Courses in Brazil
Thousands of students
In this context, distance learning courses, for both graduate and undergraduate courses, are becoming increasingly popular in Brazil due to a combination of (a) greater flexibility, as most students also work and would prefer a more flexible alternative, (b) higher affordability, as tuition fees are approximately 70% lower than average tuition fees for on-campus courses, (c) similar quality standards, with a more engaging and digital methodology and (d) a promising career path, with degrees which are the same as an on-campus degree, a proven increase in employability and a positive impact on average salaries.
Students from low-income families are able to become the first generation of their family to attend university by enrolling in a distance learning course. According to Educa Insights, a postsecondary education degree increases employability levels and salaries by 65.3%, with an additional 51.9% increment following the completion of post-graduate education.
Salary Gap of Students in Brazil
Source: Educa Insights
On-Campus and Distance Learning Education Models
While on-campus education requires students to be present in person, distance learning is more flexible, and provides an engaging and efficient way to participate in classes. We believe that distance learning also provides a similar quality of education and a better user experience as it addresses most of the problems faced by students in Brazil.
Distance learning became more effective with technology advances and improved access to the Internet, which makes it possible to offer teaching in multiple formats, including live streaming and recorded classes (with live chat support), among others.
On-Campus and Distance Learning Models Side by Side
Source: INEP, Educa Insights
On-Campus and Distance Learning Student Profile
There are significant differences between the typical on-campus and distance learning student profiles. The former are typically recent secondary school graduates between 17 and 24 years old, whereas the latter are typically working adults, with over 85% of the distance learning student consisting of persons who are over 25. In recent years, there has been a reduction in the average age of distance learning students driven by the increase in the acceptance levels of this type of education among students between 18 to 24 years old.
As shown in the graph below, 80% of distance learning students are working students, whereas just 56% of on-campus students have jobs. In addition, 68% of on-campus students are from the lower income families in Brazil, while in distance learning the percentage is 77%.
There is no significant difference in the degree of acceptance of distance learning acceptance across age groups, with only a 1.4 percentage points variation in students above 21 years old as compared to an overall acceptance level of 87.4% for students who are 20-year-old and under.
Despite the fact that distance learning students typically completed their secondary education in public schools (only 14% of distance learning students have attended private secondary schools), there are no disparities in quality between these two formats. According to the latest ENADE results released in 2019, which provides an individual assessment of postsecondary education students by course, there is no significant difference in grades.
In addition, 69% of distance learning students are women, whereas only 57% of on-campus students are women. The different profiles of on-campus and distance learning students in Brazil are illustrated in the graph below.
On-Campus and Distance Learning
Student Profiles in Brazil
According to ABMES, based on INEP (2018)
Source: ABMES, INEP 2018, Educa Insights
Distance Learning Acceptance and Employability
As a result of students’ perception that the quality of on-campus and distance learning courses is similar and given the abovementioned differences between these formats, there has been a major increase in the acceptance of distance learning in the last few years, with a 25% improvement from 2017.
A 2017 survey conducted by Educa Insights across Brazil showed that 65.9% of the students would be willing to take a distance learning course. This survey was conducted again in 2020 and the acceptance level reached 91.4%, showing a significant increase over the period from 2017 to 2020.
Distance Learning Acceptance
% of Students Interviewed
Source: Educa Insights
In addition, according to Educa Insights, there is no significant difference in employability levels for graduates of on-campus and distance learning courses. People with a postsecondary education degree experience less unemployment than those without one (there is an employment rate of 81% for people who complete distance learning undergraduate courses and 89% for those who complete distance learning graduate courses).
Distance Learning Education
Distance Learning Overview
In Brazil, distance learning programs can provide the same graduation degrees as traditional on campus programs. As a condition to offering the same degrees for on campus courses, distance learning courses are required to have the same defined duration, curriculum, and on-site final exams managed by accredited institutions.
There are three main postsecondary education distance learning offerings in Brazil:
|(i)||100% online: pure online programs in which the student has online access to content and course activities, and goes to the hub only for end-of-semester exams;|
|(ii)||Video conference-based: classes which are broadcast to several students via video conference; and|
|(iii)||Hybrid: students have access to content through online platforms when/where appropriate, but also hold in-person weekly meetings and classes with on-site tutors.|
According Educa Insights, out of the 6.4 million students enrolled in private undergraduate courses in 2018, approximately 1.8 million students were enrolled in distance learning courses. In addition, distance learning represents an even higher share of new enrollments, at 46% of total new private enrollments in 2018 (a level which has been above 17% since 2008).
Students without a strong academic background are more likely to benefit from hybrid courses than in 100% online courses as a result of hybrid courses providing a greater degree of interaction with teachers and tutors. According to Educa Insights, 51% of secondary school students consider having at least one face-to-face interaction per week as the most relevant factor when choosing distance learning courses.
We believe that postsecondary education students in Brazil require not only more affordable and flexible study alternatives, but an academic experience that involves personal contact with faculty and other students in order to develop their skills better. Given its flexibility, it is expected that the hybrid model will drive market share gains for distance learning in the coming years. According to Educa Insights, hybrid courses, which accounted for 4% of the total student base as of December 31, 2018, are expected to account for 19% of the overall student base by the end of 2023. The overall share of students enrolled in distance learning (both hybrid and online) is expected to increase to 49%. The growth in enrolments in the hybrid model is not expected to come at the expense of the 100% online offering model as the target students are not the same. However, it is expected that the on-campus offering model
will be negatively impacted by the growth in the hybrid model, as it also combines face-to-face and online classes but is more expensive.
Evolution of Student Enrollment: Strong
Growth of Hybrid Model
Student Base (MM and %)
Source: Educa Insights
As a result of the Brazilian government’s phasing out of FIES, which supported almost 40% of enrolled students in private on-campus postsecondary education at its peak in 2014 (in comparison to 5% in 2018) and the low availability of private financing alternatives for education, distance learning courses have proven to be resilient and well positioned to attract students in need of an affordable alternative. Demand for distance learning courses has increased by almost 50% in the period while on-campus courses’ demand has decreased.
Given that tuition is a key consideration for students and that there is no difference between on-campus and distance learning degrees, the distance learning offering is typically more appealing to students. While average on-campus tuition is R$796 per month, which represents almost half the average student wage in private universities, the average distance learning ticket is significantly lower and is at R$266 per month. Affordable distance learning tickets are a result of lower personnel expenses and lease costs, combined with the scalability of online platforms for virtual/online classes. In addition, online platforms are able to access the national market while offering flexibility to students.
Larger cities (mostly state capitals and their surrounding areas), usually have a broad educational offering with a comprehensive portfolio for students. Conversely, smaller towns (i.e. those with fewer than 30,000 students) lack quality alternatives. Therefore, we believe that distance learning model provides a consistent regional offering, with quality levels equivalent to those found in major cities and attractiveness to local students while also creating an opportunity to increase postsecondary penetration across Brazil.
As shown in the chart below, almost all Brazilian cities with a population of over 30,000 (approximately 1,159 cities) have distance learning units. Distance learning units become rarer as cities decrease in size.
Number of Cities
with Distance Learning Units by Size
Source: Educa Insights
Given the size of Brazil’s territory, expansion to cities with lower density can be challenging for on-campus players and provides opportunities for distance learning players. The partnership model with local hubs results in the ability to deploy a complete product portfolio with limited local investment and own-site ownership, which we believe improves student experience and makes for a better financial profile. As a result, growth rates in terms of number of new students in the Brazilian countryside have been greater (39%) than in state capitals (20%), according to Educa Insights as of 2018.
Technology’s Role on Distance Learning
Technological progress has eliminated classroom walls and the boundaries of learning environments. New technologies, such as artificial intelligence and machine learning, have been sweeping through the market and have resulted in innovations in how students and teachers perceive learning methodologies and engage with their students. Most importantly, with the democratization of internet connectivity, the general population can easily access information online. According to the Brazilian National Internet Committee (Comitê Gestor da Internet no Brasil), the number of Brazilian internet users has more than doubled in the last 10 years, from 34 million Brazilian internet users in the last three months of 2008 to 70 million users in 2018, 97% of whom had access to the internet on mobile platforms.
Innovations include cloud-based collaboration, which allows students and tutors to share documents in a flexible manner that reduces the need for face-to-face interactions. Over the past decade, as a result of the arrival of new learning models, traditional educational methods have evolved in line with distance learning methods which have become more engaging and appealing to students. This has led to improvements in the overall learning experience and to a degree of business scalability. Investments in technology have become increasingly important to education providers. The importance of digital solutions has increased, making it possible to offer students a differentiated value proposition. We believe that students value adaptive learning methodology, which provides them with a tailored education experience. The tailored approach help students reach their full potential by identifying and tackling topics with which they struggle while also focusing on developing soft skills.
In this context, distance learning models that incorporate technology-enabled tools for postsecondary education have driven an increase in acceptance levels by offering an accessible, affordable and fully digital platform. Their teachers and tutors are more focused on providing assistance rather than lecturing students. In a traditional classroom, students who were struggling to learn new concepts would quickly fall behind their peers, while in distance learning assignments students can advance at their own pace. The “always-available” nature of technology enables students to access online resources whenever they desire. It also give instructors a better idea of which students require additional assistance.
Improvements in connectivity have also been an important recent development. Students are now able to connect from any location due to the improvement in overall connectivity (with 4G and soon 5G networks, as well as more capable devices). As a result, they are able to access content, do homework, or check their grades online. We believe that this increases the accessibility of distance learning.
Finally, we believe that scale is an important factor in this technology-driven market, as it provides for a combination of low marginal cost per student and a highly diluted fixed cost structure. These factors make it possible to achieve the same quality levels of on-campus offerings but in a more affordable manner.
Brazil Has a Differentiated Distance Learning Offering
Worldwide online postsecondary education courses have structural differences when compared to Brazilian online postsecondary education courses. Distance learning courses in China and the US are offered purely online, with limited on-campus interactions, and with less focus on providing the same standards as for on-campus courses.
In the US, distance learning courses are usually common for graduate degrees, such as MBAs, PhDs and master’s degrees, allowing working adults to complement their undergraduate education. The learning method is typically 100% online with access to institutions’ libraries and other academic resources. Regulation restricts online bachelor’s degrees to a limited number of courses, and online courses are allowed only in certain states. Distance Learning courses in the United Stated are more mature, and have a higher penetration level of 71% of total for-profit education according to Educa Insights.
We believe that the Brazilian offering is different because it is based on the combination of technology-based content offered online and tutor support. The hybrid models avoid most of the pitfalls of online offering as they incorporate strong in-person components and use digital materials mostly as a supplement, which leads to improved student satisfaction, as well as better learning and academic outcomes.
In this context, students without strong academic backgrounds are less likely to progress in fully online courses than in courses that involve personal contact with faculty and other students and when they do progress, they have weaker outcomes. However, technology has the potential to create meaningful opportunities for those students.
Distance Learning Market Opportunity
According to Educa Insights, there is an R$104.7 billion addressable market consisting of 31.4 million students across undergraduate, post-graduate, professional qualification and technical courses.
Distance Learning Market Size
Source: Educa Insights
Undergraduate courses account for 1.9 million students and R$6.1 billion of the distance learning market and also have significant room for growth as the overall addressable market for undergraduate distance learning courses is R$37.6 billion. Distance learning post-graduate courses have an addressable market of R$31.7 billion (8.0 million students), which is almost 20 times the size of the existing market. Professional qualification and technical courses,
which are not currently offered through distance learning platforms, also represent a sizeable opportunity with an estimated total addressable market of R$14.1 billion and R$21.3 billion respectively. We believe that the market’s potential can be accessed by increasing penetration rates in basic education, technology-driven innovation, providing a more complete hybrid model and continued improvements in students’ perception of quality.
Total addressable market is calculated by Educa Insights based on current tuition paid and potential enrollments for each segment, through an assessment of Brazil’s population based on surveys for designated courses. Market size estimates are based primarily on social class distinctions within the Brazilian population, intentions to pursue a postsecondary degree, and the degree of acceptance of distance learning. Current market size, on the other hand, derives from existing total enrollments and average tuitions paid.
According to Educa Insights, further growth is still expected in the medium term. The projected market value for distance learning in Brazil will reach R$12.0 billion and 3.6 million students in 2023. While tuition is not expected to move considerably until 2023, there is an expected increase in gross enrollment penetration from 29.4% in 2018, of which only 3.9% is from students in hybrid courses, to 49.3% in 2023, of which 18.7% is from students in hybrid courses.
Private Education: Market Value Projections
Source: Educa Insights, INEP
Historically, Brazilian regulations imposed mandatory bureaucratic preapproval procedures to request the opening of new learning units, which limited growth in the distance learning segment. In order to increase offerings and attract investments to the sector, the Brazilian government issued Decree 9,057/17 and Normative Ruling 11/17, which eliminated the requirement of audit visits for new learning units and increased the number of new learning units allowed per institution, which, in turn, widened the range of course offerings and resulted in the increase of learning units from 7,100 to 12,100 from July 2017 to December 2018.
Decree 9,057/17 and Normative Ruling 11/17 simplified the opening of education units while maintaining the quality of distance learning courses, as the number of preapproved units for each university depends on the institution’s score in the last ENADE. Lower-performing institutions cannot open any new units, while higher-performing institutions can open up to 250 units per year.
Another change in regulation under discussion is the offering of hybrid law courses. Based on the culture of pursuing a career in the public sector in Brazil, which requires a bachelor’s degree in law, law degrees are commonly the most popular courses and with the largest student base among private universities. Unlike medicine,
law courses are not subject to strict regulatory requirements for the approval of new vacancies. Law courses show demand with stable growth and a relatively high return on investment.
Government discussions related to distance learning law course offerings have taken place but are currently on hold. According to the MEC, there is a real possibility that law courses will start to be offered in distance learning centers in the near future.
According to Educa Insights, on-campus law courses are likely to experience a decrease in enrollments as many prospective students are unable to incorporate face-to-face interactions into their daily routines. However, this is not a reflection of the attractiveness of the course. Rather, it is a side effect of the course offerings in distance learning, which should begin with an estimated 18% share of total enrollments in 2021 and reach an estimated 30% in 2023, representing around 85,000 enrollments per year.
New Enrollments in Law Courses
Private, Thousands of Total Enrollments
Source: Educa Insights
According to Educa Insights, over 20.0% of prospective law students would prefer to be enrolled in distance learning courses than in on-campus courses. As a result of the popularity of law degrees in Brazil, it is expected that a significant addressable market would result from the combination of on-campus students shifting towards distance learning, and new students seeking a law degree.
While medicine courses have limitations related to distance learning offerings, the opening of dentistry, psychology, and nursing courses also require the prior authorization of MEC. Launching medical courses requires approval from the Federal Councils of Health (Conselhos Federais da Área da Saúde).
Key Trends Driving Distance Learning Expansion in Brazil
We believe the following factors are expected to contribute to the expansion of the distance learning market in Brazil:
Hybrid distance learning model creates an affordable option with great user experience. The flexibility of technology-based platforms combined with active online and face-to-face tutoring presents a differentiated value proposition to students along with affordable tuition fees. With an increasing number of students who think the quality of distance learning equals that of on-campus learning, it is expected that the growth in distance learning will accelerate.
New courses offerings would increase penetration of distance learning. The ability to offer law degrees in a distance learning format would represent a significant increase in the current addressable market. Law is a leading subject for undergraduate degrees in Brazil, a key requirement for public careers, and is often selected by students as a second major. If law-related courses are allowed to be offered in a distance learning format, which is likely, we believe the demand for them would be equivalent to a third of the current course offerings in three years. The possibility of offering health-related distance learning courses with a large student base, such as nursing and dentistry, would also be significant.
Postsecondary education degrees provide better employability and average salaries. According to Educa Insights, people holding a postsecondary education degree can expect to earn 65.3% more on average than those who only completed secondary education, with no significant difference between on-campus and distance learning courses. Similarly, the unemployment rate for people holding a postsecondary education degree is 21.0%, which is 32 percentage points lower than those with only secondary school education, according to Educa Insights.
Post-graduate courses to grow supported by salary differentials and low penetration rate. We believe that the post-graduate education market still has significant room for growth as it only had 1.2 million students served by two thousand institutions as of December 31, 2018. We expect to see increasing demand for lato sensu post-graduate courses thanks to the higher employability level and salaries these courses provide, as well as the higher number of undergraduate graduations.
Technology as an education lever. With enhanced student experience and consistent quality education, the acceptance of technology in education has increased significantly in the past twenty years. For example, the acceptance rate of distance learning has increased by 25% since 2015. As people born in the early 2000s are reaching postsecondary education, the demand for technology and online support tools is increasing across all institutions.
Positive K-12 outlook. While more students are graduating than in previous generations, according to the OECD, Brazil is still lagging behind other Latin American countries in terms of number of students completing secondary education. In 2017 the MEC put in place measures to make secondary schools more attractive to students and to increase graduation rates. It is expected that an increase in graduation rates from secondary schools would lead to greater demand for undergraduate education by students between 18 and 24 years old. Enrollment in postsecondary education tends to benefit from increases in secondary school graduation rates.
Resilient postsecondary distance learning education market. Distance learning has proven to be resilient to macroeconomic downturns over the years primarily because of its value proposition. The ability to deliver better career prospects and higher wages in an affordable manner protects distance learning from the negative impacts of economic cycles and enables off-cycle growth.
Macroeconomic environment is more favorable. The new Brazilian government was able to approve significant regulatory changes that we believe are important for Brazil’s development. We believe that a positive outlook, mainly driven by a high GDP growth and confidence levels, combined with the possibility of additional reforms being approved, would be beneficial to our business.
PNE to drive further sector growth. There are still significant deliverables to be completed as part of the PNE, which was launched in 2014 and sets forth certain goals to be achieved by 2024. In addition to providing incentives for students and universities, we believe that distance learning’s unique value proposition and affordability place it in a good position to capture the growth necessary to fulfill the Brazilian government’s objectives.
The Brazilian constitution establishes education as a right of all citizens, the provision of which is a duty of the state and the family. Accordingly, the government is required to provide all Brazilian citizens with access to free primary education that requires compulsory attendance. Private investment in education is permitted so long as entities providing regulated education services comply with the applicable rules and requirements.
The Brazilian education system is organized as a cooperation regime among federal, state and municipal governments. The federal government is responsible for organizing and coordinating the federal education system in order to guarantee equal opportunity and quality of education throughout Brazil. Brazilian states and the Brazilian Federal District are required to focus on primary and secondary education (which are similar to the final years of elementary school, junior high and high school in the United States), while municipalities are responsible for providing preschool and primary education (which are similar to kindergarten and the first years of elementary school), and each is responsible for establishing and implementing the relevant rules and regulations for each educational stage for which it is responsible, including monitoring and evaluating the service, as well as issuing all relevant authorizations, recognitions and qualifications required for each such educational stage.
Private higher education institutions are part of the federal educational system and their activities are regulated by the federal government, and universities have didactic, scientific and administrative autonomy as provided by the Brazilian constitution.
Law No. 9,394/1996, or the National Education Guidelines Law (Lei de Diretrizes e Bases da Educação Nacional), or the LDB, establishes the guidelines for the provision of education services in Brazil and sets forth the federal government’s duty to: (1) coordinate the national education system; (2) prepare the PNE; (3) provide technical and financial assistance to the states, the Federal District and municipalities; (4) define, in cooperation with other federal entities, the responsibilities and guidelines for primary and secondary education; and (5) issue rules and regulations regarding postsecondary courses, and carry out activities relating to the accreditation of institutions, authorization and recognition of courses and monitoring and evaluation of all the educational system.
In addition, the federal government, through Law No. 13,005 of June 25, 2014, implemented the PNE, with a duration of 10 years from the date of its publication. The PNE established objectives for Brazilian education. For postsecondary education, the objectives are: (1) increasing postsecondary education enrollment rates to 50% of the population aged 18 to 24; (2) increasing the quality of postsecondary education by raising the proportion of academic staff with master’s and doctorate degrees to 75%, of which at least 35% shall be doctorates; and (3) increasing progressively stricto sensu postgraduate courses. Such goals apply to each federation territory, and provide guidance for the private education sector.
Accordingly, each of the federal, state and municipal governments was required to prepare a 10-year education plan and establish policies, guidelines and objectives applicable to the segment of the Brazilian education system over which it is responsible. In addition, these objectives act as guidelines for the private education sector.
The postsecondary education sector is subject to comprehensive government regulation. Its purpose is to ensure the quality of educational services, through evaluations of the ability of educational institutions to meet minimum standards established by the CNE and approved by the MEC. This evaluation includes the analysis of pedagogical projects, the infrastructure of educational institutions and the academic staff, and the results of such evaluations are considered in the proceedings for opening new units and new courses.
Therefore, activities and courses offered by education institutions in Brazil depend on authorizations and are subject to ongoing regulation. The federal responsibility to regulate, monitor and evaluate postsecondary education institutions and courses is exercised by the MEC, the CNE, the INEP, the CONAES, the SERES and the SETEC.
The main regulatory bodies of postsecondary education in the Brazilian education system are:
|·||Higher Education Board (Câmara de Educação Superior), or CES;|
|·||the SERES; and|
|·||Secretariat of Professional and Technical Education (Secretaria de Educação Profissional e Tecnológica), or SETEC.|
The MEC is the federal government agency responsible for education in Brazil. It formulates and evaluates Brazilian national education policy, ensuring the quality of education and compliance with education regulations. The INEP is a collegiate federal entity responsible for evaluating educational institutions and student performance, as well as conducting research in order to provide a reliable database for public use.
The MEC is assisted by the CNE, which is the entity with decision-making and deliberative powers to ensure the improvement of national education. The CNE is comprised of the CEB, which is the collegiate r