UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 20-F

 

(Mark One)

 

REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934

 

OR

 

ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                           to                          .

 

OR

 

SHELL COMPANY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Date of event requiring this shell company report                                  

 

Commission file number: 001-39519

Vitru Limited
(Exact name of Registrant as specified in its charter)

 

Not applicable
(Translation of Registrant’s name into English)

 

Cayman Islands
(Jurisdiction of incorporation or organization)

 

Rodovia José Carlos Daux, 5500, Torre Jurerê A,
2nd floor, Saco Grande, Florianópolis, State of Santa Catarina,

Brazil

88032-005
+55 (11) 3047-2699
(Address of principal executive offices)

Carlos Henrique Boquimpani de Freitas, Chief Financial Officer
Rodovia José Carlos Daux, 5500, Torre Jurerê A,
2nd floor, Saco Grande, Florianópolis, State of Santa Catarina,

Brazil

88032-005
+55 (11) 3047-2699
(Name, Telephone, E-mail and/or Facsimile number and Address of Company Contact Person)

 

Copies to:
Manuel Garciadiaz
Davis Polk & Wardwell LLP
450 Lexington Avenue
New York, NY 10017
Phone: (212) 450-4000
Fax: (212) 450-6858

 

Securities registered or to be registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common shares, par value U.S.$0.00005 per share VTRU The NASDAQ Global Select Market

 

Securities registered or to be registered pursuant to Section 12(g) of the Act:

 

None

 

Securities for which there is a reporting obligation pursuant to Section 15(d) of the Act:

 

None

 

 

 

Indicate the number of outstanding shares of each of the issuer’s classes of capital or common stock as of the close of the period covered by the annual report.

 

The number of outstanding shares as of December 31, 2020 was 23,058,053 common shares.

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

 

  Yes No  

 

If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.

 

  Yes No  

 

Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

 

  Yes No  

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

 

  Yes No  

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large Accelerated Filer   Accelerated Filer   Non-accelerated Filer   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 13(a) of the Exchange 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.

 

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report:

 

Indicate by check mark which basis of accounting the registrant has used to prepare the financial statements included in this filing:

 

U.S. GAAP

 

International Financial Reporting Standards as issued by the International Accounting Standards Board

 

Other

 

If “Other” has been checked in response to the previous question, indicate by check mark which financial statement item the registrant has elected to follow.

 

  Item 17 Item 18  

 

If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

 

  Yes No  

 

 

 

 

 

 

VITRU LIMITED

 

table of contents

  

Page

 

Presentation of Financial and Other Information iii
Forward-Looking Statements 1
Part I 3
Item 1. Identity of Directors, Senior Management and Advisers 3
A.   Directors and Senior Management 3
B.   Advisers 3
C.   Auditors 3
Item 2. Offer Statistics and Expected Timetable 3
A.   Offer Statistics 3
B.   Method and Expected Timetable 3
Item 3. Key Information 3
A.   Selected Financial Data 3
B.   Capitalization and Indebtedness 10
C.   Reasons for the Offer and Use of Proceeds 10
D.   Risk Factors 10
Item 4. Information on the Company 51
A.   History and Development of the Company 51
B.   Business Overview 54
C.   Organizational Structure 107
D.   Property, Plant and Equipment 108
Item 4A. Unresolved Staff Comments 108
Item 5. Operating and Financial Review and Prospects 109
A.   Operating Results 109
B.   Liquidity and Capital Resources 129
C.   Research and Development, Patents and Licenses, Etc. 131
D.   Trend Information 130
E.   Off-Balance Sheet Arrangements 132
F.   Tabular Disclosure of Contractual Obligations 133
G.   Safe Harbor 133
Item 6. Directors, Senior Management and Employees 133
A.   Directors and Senior Management 133
B.   Compensation 137
C.   Board Practices 139
D.   Employees 140
E.   Share Ownership 140
Item 7. Major Shareholders and Related Party Transactions 140
A.   Major Shareholders 140
B.   Related Party Transactions 141
C.   Interests of Experts and Counsel 143
Item 8. Financial Information 143
A.   Consolidated Statements and Financial statements 143
B.   Significant Changes 145
Item 9. The Offer and Listing 145
A.   Offering and Listing Details 145
B.   Plan of Distribution 145
C.   Markets 145
D.   Selling Shareholders 145
E.   Dilution 145
F.   Expenses of the Issue 145
Item 10. Additional Information 145
A.   Share Capital 145

 

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B.   Memorandum and Articles of Association 146
C.   Material Contracts 155
D.   Exchange Controls 156
E.   Taxation 156
F.   Dividends and Paying Agents 159
G.   Statement by Experts 159
H.   Documents on Display 159
I.     Subsidiary Information 159
Item 11. Quantitative and Qualitative Disclosures About Market Risk 159
Item 12. Description of Securities Other Than Equity Securities 161
A.   Debt Securities 161
B.   Warrants and Rights 161
C.   Other Securities 161
D.   American Depositary Shares 161
Part II 162
Item 13. Defaults, Dividend Arrearages and Delinquencies 162
A.   Defaults 162
B.   Arrears and Delinquencies 162
Item 14. Material Modifications to the Rights of Security Holders and use of Proceeds 162
A.   Material Modifications to Instruments 162
B.   Material Modifications to Rights 162
C.   Withdrawal or Substitution of Assets 162
D.   Change in Trustees or Paying Agents 162
E.   Use of Proceeds 162
Item 15. Controls and Procedures 162
A.   Disclosure Controls and Procedures 162
B.   Management’s Annual Report on Internal Control over Financial Reporting 163
C.   Attestation Report of the Registered Public Accounting Firm 163
D.   Changes in Internal Control over Financial Reporting 163
Item 16. Reserved 163
Item 16A. Audit Committee Financial Expert 163
Item 16B. Code of Ethics 163
Item 16C. Principal Accountant Fees and Services 163
Item 16D. Exemptions from the Listing Standards for Audit Committees 164
Item 16E. Purchases of Equity Securities by the Issuer and Affiliated Purchasers 164
Item 16F. Change in Registrant’s Certifying Accountant 164
Item 16G. Corporate Governance 164
Item 16H. Mine Safety Disclosure 169
Part III 170
Item 17. Financial Statements 170
Item 18. Financial Statements 170
Item 19. Exhibits 170
Index to Consolidated Financial Statements F-1

 

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Presentation of Financial and Other Information

 

Unless otherwise indicated or the context otherwise requires, all references in this annual report to “Vitru” or the “Company,” “we,” “our,” “ours,” “us” or similar terms refer to Vitru Limited, together with its subsidiaries.

 

All references to “Vitru Brasil” refer to Vitru Brasil Empreendimentos, Participações e Comércio S.A., our Brazilian principal operating subsidiary.

 

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

 

All references to the “Companies Act” are to the Cayman Islands’ Companies Act (As Revised) as the same may be amended from time to time, unless the context otherwise requires.

 

All references to “IFRS” are to International Financial Reporting Standards, as issued by the IASB.

 

Financial Statements

 

Vitru was incorporated on March 5, 2020, as a Cayman Islands exempted company with limited liability, under incorporation number 360670, duly registered with the Cayman Islands Registrar of Companies. Vitru became the parent company of Vitru Brasil Empreendimentos, Participações e Comércio S.A., or Vitru Brasil, through the corporate reorganization described under “—Corporate Events,” “Item 4. Information on the Company—A. History and Development of the Company—Our Pre-IPO Corporate Reorganization” and in note 1 to our audited consolidated financial statements.

 

Until the contribution of Vitru Brasil’s shares to us, we had not commenced operations and had only nominal assets and liabilities and no material contingent liabilities or commitments. Subsequent to the completion of the corporate reorganization, we began to consolidate financial information in order to reflect the operations of Vitru Brasil. As a result, the audited consolidated financial statements prepared by Vitru subsequent to the completion of the reorganization are presented “as if” Vitru Brasil is the predecessor of Vitru. Accordingly, our audited consolidated financial statements included elsewhere in this annual report reflect: (i) the historical operating results of Vitru Brasil prior to such reorganization; (ii) the consolidated results of Vitru and Vitru Brasil following the reorganization; and (iii) the assets and liabilities of Vitru Brasil at their historical cost.

 

The consolidated financial information of Vitru contained in this annual report is derived from our audited consolidated financial statements as of December 31, 2020 and 2019 and for the three years ended December 31, 2020, 2019 and 2018, together with the notes thereto. All references herein to “our financial statements,” “our audited consolidated financial information,” and “our audited consolidated financial statements” are to Vitru’s consolidated financial statements included elsewhere in this annual report.

 

Vitru is a holding company, and as such, the primary source of revenue derives from its interest on its operational companies in Brazil. As a result, Vitru’s functional currency as well as of its subsidiaries is the Brazilian real. We prepare our annual consolidated financial statements in accordance with International Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.

 

This financial information should be read in conjunction with “Item 5. Operating and Financial Review and Prospects” and our consolidated financial statements, including the notes thereto, included elsewhere in this annual report.

 

Our fiscal year ends on December 31. References in this annual report to a fiscal year, such as “fiscal year 2020,” relate to our fiscal year ended on December 31 of that calendar year.

 

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Corporate Events

 

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 our initial public offering, our controlling 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 Controlling Shareholders, held 522,315,196 shares of Vitru Brasil. Prior to the consummation of our initial public offering, our Controlling Shareholders contributed all of their shares in Vitru Brasil to us. In return for this contribution, we issued new common shares to our Controlling Shareholders in a one-to-31 exchange for the shares of Vitru Brasil contributed to us, or the Share Contribution. Until the contribution of Vitru Brasil shares to us, we had not commenced operations and had only nominal assets and liabilities and no material contingent liabilities or commitments.

 

After accounting for the new common shares that were issued and sold by us in our initial public offering, we had a total of 23,058,053 common shares issued and outstanding as of December 31, 2020. 16,848,874 of these shares were common shares beneficially owned by our Controlling Shareholders, 209,179 of these shares were common shares beneficially owned by members of our management and other shareholders who acquired shares prior to our initial public offering, and 6,000,000 of these shares were common shares beneficially owned by investors who acquired shares in our initial public offering.

 

The diagram below depicts our organizational structure as of the date of this annual report:

 

 

Below is a brief description of our subsidiaries:

 

Vitru Brasil (Vitru Brasil Empreendimentos, Participações e Comércio S.A.)

 

Vitru Brasil is an operating subsidiary and 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 Brasil 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

 

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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.

 

Additional Information

 

See note 2.2 to our audited consolidated financial statements included elsewhere in this annual report 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 annual report 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 or any other rate. Unless otherwise indicated, we have translated real amounts into U.S. dollars using a rate of R$5.197 to U.S.$1.00, the commercial selling rate for U.S. dollars as of December 31, 2020 as reported by the Brazilian Central Bank. The rate at December 31, 2020, which is the rate used for currency translations of certain amounts in this annual report, may differ materially from the exchange rate as of the date of this annual report or any other date.. See “Item 3. Key Information—A. Selected financial data—Exchange Rates” for more detailed information regarding translation of reais into U.S. dollars and for historical exchange rates for the Brazilian real.

 

Special Note Regarding Non-GAAP Financial Measures

 

This annual report 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 net income (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 taxes (Imposto de Renda Pessoa Jurídica), or IRPJ, and, social contribution taxes (Contribuição Social sobre o Lucro Líquido), or CSLL;

 

·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;

 

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·other income (expenses), net, which consists of other expenses such as contractual indemnities and deductible donations among others;

 

·M&A, pre-offering expenses and restructuring expenses, which consists of adjustments that we believe are appropriate to provide additional information to investors about certain material non-recurring items. Such M&A, pre-offering expenses and restructuring expenses comprise: (i) 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 (ii) restructuring expenses, which refers to expenses related to employee severance costs in connection with organizational and academic restructurings.

 

We calculate Adjusted Net Income as net income (loss) for the year plus:

 

·share-based compensation plan, as defined above;

 

·M&A, pre-offering expenses and restructuring 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, each included elsewhere in this annual report;

 

·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 18 to our audited consolidated financial statements, each included elsewhere in this annual report; 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 M&A, pre-offering expenses and restructuring 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 annual report 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 “Item 3. Key Information—A. Selected Financial Data.”

 

Market Share and Other Information

 

This annual report contains data related to economic conditions in the market in which we operate. The information contained in this annual report 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 annual report 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, or the SEC, website) and industry publications. We obtained the information included

 

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in this annual report 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, we have not 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 annual report, none of the publications, reports or other published industry sources referred to in this annual report were commissioned by us or prepared at our request. Except as disclosed in this annual report, we have not sought or obtained the consent of any of these sources to include such market data in this annual report.

 

Rounding

 

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

 

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Forward-Looking Statements

 

This annual report on Form 20-F contains statements that constitute forward-looking statements. Many of the forward-looking statements contained in this annual report can be identified by the use of forward-looking words such as “anticipate,” “believe,” “could,” “expect,” “should,” “plan,” “intend,” “is designed to,” “may,” “predict,” “continue,” “estimate” and “potential,” or the negative of these words, among others.

 

Forward-looking statements appear in a number of places in this annual report 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 various factors, including, but not limited to, those identified under the section entitled “Risk Factors” in this annual report. These risks and uncertainties include factors relating to:

 

·the impact of the 2019 novel coronavirus, or 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 (see “Item 3. Key Information–D. Risk FactorsCertain Risks Relating to Our Business and IndustryThe 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,” “Item 4. Information on the Company—A. History and Development of the Company—Recent Events—COVID-19 Pandemic” and “Item 5. Operating and Financial Review and Prospects—Impact of COVID-19”);

 

·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;

 

·our ability to grow our business;

 

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

 

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·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

 

·risk factors discussed under “Item 3. Key Information—D. Risk Factors.”

 

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

 

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Part I

 

Item 1. Identity of Directors, Senior Management and Advisers

 

A.Directors and Senior Management

 

Not applicable.

 

B.Advisers

 

Not applicable.

 

C.Auditors

 

Not applicable.

 

Item 2. Offer Statistics and Expected Timetable

 

A.Offer Statistics

 

Not applicable.

 

B.Method and Expected Timetable

 

Not applicable.

 

Item 3. Key Information

 

A.Selected Financial Data

 

You should read the following selected financial data together with “Item 5. Operating and Financial Review and Prospects” and our Consolidated Financial Statements and the related notes appearing elsewhere in this annual report.

 

The following tables set forth our summary financial and operating data as of December 31, 2020 and 2019 and statement of operations for the years ended December 31, 2020, 2019 and 2018. The summary consolidated statements of financial position as of December 31, 2020 and 2019 and the summary consolidated statements of profit or loss and other comprehensive income for the years ended December 31, 2020, 2019 and 2018 have been derived from our audited consolidated financial statements included elsewhere in this annual report, prepared in accordance with IFRS, as issued by the IASB.

 

For convenience purposes only, amounts in reais, as of December 31, 2020, have been translated to U.S. dollars using an exchange rate of R$5.197 to U.S.$1.00, the commercial selling rate for U.S. dollars, as of December 31, 2020, 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.

 

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   For the Year Ended December 31,
   2020  2020  2019  2018
   U.S.$ millions(1)  R$ millions
Statement of Profit or Loss Data            
Net revenue    99.9    519.2    461.1    383.4 
Revenue from distance-learning undergraduate courses    81.4    423.0    336.3    259.6 
Revenue from continuing education courses    7.8    40.6    47.1    33.0 
Revenue from on-campus undergraduate courses    10.7    55.6    77.6    90.8 
Cost of services rendered    (42.6)   (221.5)   (211.5)   (184.2)
Gross profit    57.3    297.7    249.5    199.3 
                     
Selling expenses    (16.7)   (86.6)   (100.9)   (70.6)
General and administrative expenses    (14.2)   (73.9)   (125.3)   (90.7)
Net impairment losses on financial assets    (14.8)   (76.8)   (58.2)   (44.6)
Other income (expenses), net    0.1    0.5    (0.9)   (1.0)
Operating expenses    (45.6)   (236.8)   (285.4)   (206.9)
Operating profit (loss)    11.7    60.9    (35.9)   (7.6)
                     
Financial income    7.0    36.5    19.2    22.0 
Financial expenses    (12.4)   (64.4)   (60.4)   (64.6)
Financial results    (5.4)   (27.9)   (41.2)   (42.6)
Profit (loss) before taxes    6.3    33.0    (77.1)   (50.2)
                     
Current income taxes    (3.8)   (19.5)   (14.8)   (10.6)
Deferred income taxes    7.4    38.6    25.7    15.7 
Income tax    3.7    19.1    10.9    5.0 
Net income (loss) for the year    10.0    52.1    (66.2)   (45.2)
Basic earnings per share—R$ (unless otherwise indicated)(2)                    
Common Shares    0.53    2.79    (3.93)   (2.78)
Diluted earnings per share—R$ (unless otherwise indicated)(3)                    
Common Shares    0.53    2.68    (3.93)   (2.78)

 
(1)For convenience purposes only, amounts in reais as of December 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.197 to U.S.$1.00, the commercial selling rate for U.S. dollars as of December 31, 2020 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)Calculated by dividing the profit (loss) attributable to the shareholders by the weighted average number of common shares outstanding during the year.

 

(3)Calculated by dividing the profit (loss) attributable to the shareholders by the weighted average number of common shares outstanding during the year plus the weighted average number of common shares that would be issued on conversion of all potential common shares with dilutive effects.

 

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   As of December 31,
   2020  2020  2019  2018
   U.S.$ millions(1)  R$ millions
Statement of Financial Position Data:            
Assets            
Current assets            
Cash and cash equivalents    16.5    85.9    2.5    2.4 
Short-term investments    99.1    515.2    72.3    164.8 
Trade receivables    22.1    115.1    88.1    71.4 
Income taxes recoverable    0.4    2.2    4.7    5.5 
Prepaid expenses    2.0    10.2    8.9    7.2 
Other current assets    0.6    3.1    1.9    1.2 
    140.8    731.7    178.4    252.5 
Assets classified as held for sale(2)             36.5     
Total current assets    140.8    731.7    214.9    252.5 
                     
Non-current assets                    
Trade receivables    1.3    6.9    3.8    5.4 
Indemnification assets    1.8    9.2    14.8    16.5 
Deferred tax assets    9.8    50.8    37.1    29.9 
Other non-current assets    0.7    3.6    1.4    1.2 
Right-of-use assets    24.6    127.9    88.5    74.8 
Property and equipment    18.6    96.7    70.0    63.4 
Intangible assets    127.2    661.0    658.2    735.3 
Total non-current assets    184.0    956.1    873.8    926.5 
Total assets    324.8    1,687.8    1,088.7    1,179.0 
                     
Liabilities and Equity                    
Current liabilities                    
Trade payables    6.2    32.2    30.0    17.1 
Loans and financing    29.2    151.8         
Lease liabilities    4.5    23.4    17.3    15.4 
Labor and social obligations    5.1    26.7    16.8    16.1 
Income tax payable                 
Taxes payable    0.5    2.4    1.6    1.7 
Prepayments from customers    1.9    9.7    3.2    1.2 
Accounts payable from acquisition of subsidiaries    26.0    135.0    128.9    123.3 
Other current liabilities    0.3    1.4    0.3    0.3 
    73.6    382.6    198.1    175.1 
Liabilities directly associated with assets classified as held for sale(2)            23.3     
Total current liabilities    73.6    382.6    221.4    175.1 
                     
Non-current liabilities                    
Loans and financing                  
Lease liabilities    24.2    126.0    85.9    73.3 
Share-based compensation    8.9    46.2    35.0    7.0 
Accounts payable from acquisition of subsidiaries    26.9    139.9    250.7    335.2 
Provisions for contingencies    2.8    14.4    18.4    18.0 
Deferred tax liabilities             25.0    43.4 
Other non-current liabilities    0.1    0.7    1.1    7.5 
Total non-current liabilities    63.0    327.2    416.0    484.5 
Total liabilities    136.6    709.8    637.4    659.6 
                     
                     
Equity                    
Share capital            548.4    546.5 
Capital reserves    196.7    1,022.1    (1.3)   2.5 
Revenue reserves            0.4    0.4 
Retained earnings (accumulated losses)    (8.5)   (44.1)   (96.2)   (30.1)
Total equity    188.2    978.0    451.3    519.4 
Total liabilities and equity    324.8    1,687.8    1,088.7    1,179.0 

 

(1)For convenience purposes only, amounts in reais as of December 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.197 to U.S.$1.00, the commercial selling rate for U.S. dollars as of December 31, 2020 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)In December 2019, we decided to sell our subsidiaries FAC/FAMAT and FAIR and the undergraduate operations on the campuses of Assevim and Famesul, which account for a portion of our on-campus undergraduate courses segment. As a result of this decision we classified the related assets and liabilities as “held for sale” in 2019, since we understood that these assets available for immediate sale in their present condition subject only to terms that are usual and customary for these types of transactions, that this sale was likely to occur given then existing plans and was expected to occur within the next six months, and that an active program to locate a buyer and complete the plan had been initiated. However, in September 2020, as a result of our receipt of the proceeds from our initial public offering and the course of events during 2020, we came to the conclusion that there was no further reason to sell these assets immediately. For more information, see note 12 to our audited consolidated financial statements, included elsewhere in this annual report.

 

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Non-GAAP Financial Measures

 

Adjusted EBITDA, Adjusted Net Income and Free Cash Flow

 

   For the Year Ended December 31,
   2020  2020  2019  2018
   U.S.$ millions(1)  R$ millions
Net revenue    99.9    519.2    461.1    383.4 
Net income (loss) for the year    10.0    52.1    (66.2)   (45.2)
Adjusted EBITDA(2)    28.2    146.7    117.6    107.8 
Adjusted Net Income(3)    18.9    98.2    57.7    55.4 
Cash flow from operations    27.2    141.6    98.0    88.0 
Adjusted Cash Flow Conversion from Operations(4)    88%   88%   75%   79%

 

(1)For convenience purposes only, amounts in reais as of December 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.197 to U.S.$1.00, the commercial selling rate for U.S. dollars as of December 31, 2020 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)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.”

 

(3)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.”

 

(4)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.”

 

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Operating Data

 

The following table below sets forth certain of our operating data for each of the years indicated:

 

   As of December 31,
   2020  2019  2018  2017  2016
Number enrolled students    309,560    240,946    189,295    140,363    115,325 
Number of distance learning undergraduate students    256,953    195,613    148,711    106,576    81,406 
Number of distance learning graduate students    44,570    35,952    30,227    22,910    21,108 
Number of hubs    709    545    370    221    72 

 

Reconciliations for Non-GAAP Financial Measures

 

The following tables set forth reconciliations of Adjusted EBITDA and Adjusted Net Income to our net income (loss) for the years ended December 31, 2020, 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 years indicated:

 

   For the Year Ended December 31,
   2020  2020  2019  2018
   U.S.$ millions(1)  R$ millions
Net income (loss) for the year    10.0    52.1    (66.2)   (45.2)
(+) Deferred and current income tax    (3.7)   (19.1)   (10.9)   (5.0)
(+) Financial results    5.4    27.9    41.2    42.6 
(+) Depreciation and amortization    9.9    51.5    62.4    56.3 
(+) Interest on tuition fees paid in arrears    3.0    15.7    8.3    8.9 
(+) Impairment of non-current assets            51.0    33.5 
(+) Share-based compensation plan    2.3    11.9    26.4    7.5 
(+) Other income (expenses), net    (0.1)   (0.5)   0.9    1.0 
(+) M&A, pre-offering expenses and restructuring expenses    1.4    7.2    4.5    8.2 
Adjusted EBITDA(2)    28.2    146.7    117.6    107.8 
                     
 
(1)For convenience purposes only, amounts in reais for the year ended December 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.197 to U.S.$1.00, the commercial selling rate for U.S. dollars as of December 31, 2020 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)We calculate Adjusted EBITDA as net income (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 M&A, pre-offering expenses and 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.”

 

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Reconciliation of Adjusted Net Income

 

The following table below sets forth a reconciliation of our profit to Adjusted Net Income for each of the years indicated:

 

   For the Year Ended December 31,
   2020  2020  2019  2018
   U.S.$(1)  R$
   (in millions)
Net income (loss) for the year    10.0    52.1    (66.2)   (45.2)
(+) M&A, pre-offering expenses and restructuring expenses    1.4    7.2    4.5    8.2 
(+) Impairment of non-current assets            51.0    33.5 
(+) Share-based compensation plan    2.3    11.9    26.4    7.5 
(+) Amortization of intangible assets from business combinations    2.8    14.6    37.3    37.3 
(+) Interest accrued on accounts payable from the acquisition of subsidiaries    3.5    18.0    23.4    27.1 
(+) Corresponding tax effects on adjustments    (1.1)   (5.6)   (18.7)   (13.0)
Adjusted Net Income(2)    18.9    98.2    57.7    55.4 
 
(1)For convenience purposes only, amounts in reais for the year ended December 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.197 to U.S.$1.00, the commercial selling rate for U.S. dollars as of December 31, 2020 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)We calculate Adjusted Net Income as net income (loss) for the year plus share-based compensation plan plus M&A, pre-offering expenses and restructuring 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.”

 

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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 years indicated:

 

   For the Year Ended December 31,
   2020  2020  2019  2018
   U.S.$(1)  R$
   (in millions)
Cash flow from operations    27.2    141.6    98.0    88.0 
(+) Income tax paid    (3.6)   (18.7)   (12.7)   (9.4)
Adjusted Cash Flow from Operations    23.6    122.9    85.3    78.6 
Adjusted EBITDA(2)    28.2    146.7    117.6    107.8 
(-) M&A, pre-offering expenses and restructuring expenses    (1.4)   (7.2)   (4.5)   (8.2)
Adjusted EBITDA excluding M&A, pre-offering expenses and restructuring expenses    26.8    139.5    113.1    99.6 
Adjusted Cash Flow Conversion from Operations(3) (2)   88%   88%   75%   79%
                     
 
(1)For convenience purposes only, amounts in reais for the year ended December 31, 2020 have been translated to U.S. dollars using an exchange rate of R$5.197 to U.S.$1.00, the commercial selling rate for U.S. dollars as of December 31, 2020 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)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 net income (loss) for the year, see “—Reconciliation between Adjusted EBITDA and loss for the year.”

 

(3)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 M&A, pre-offering expenses and restructuring 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.”

 

Exchange Rates

 

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

 

The real depreciated against the U.S. dollar from mid-2011 to early 2016. In particular, during 2015, due to the poor economic conditions in Brazil, including as a result of political instability, the real depreciated at a rate that was much higher than in previous years. On September 24, 2015, the real fell to its lowest level since the introduction of the currency, at R$4.1945 per U.S.$1.00. Overall in 2015, the real depreciated 47.0%, reaching R$3.9048 per U.S.$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$3.2591 per U.S.$1.00 on December 31, 2016. In 2017, the real depreciated 1.5% against the U.S. dollar, ending the year at an exchange rate of R$3.308 per U.S.$1.00. The real/U.S. dollar exchange rate reported by the Brazilian Central Bank was R$3.8748 per U.S.$1.00 on December 31, 2018, which reflected a 17.1% depreciation in the real against the U.S. dollar during 2018, primarily as a result of lower interest rates in Brazil, which reduced the volume of foreign currency deposited in Brazil in the “carry trade,” as well as uncertainty regarding the results of the Brazilian presidential elections held in October 2018. On December 31, 2019 and 2020, the period-end real/U.S. dollar exchange rate was R$4.031 and R$5.197, respectively, per U.S.$1.00, which represented depreciation of 4.0% and 28.9%, respectively, during the corresponding years. There can be no assurance that the real will not depreciate or appreciate further against the U.S. dollar.

 

The Brazilian Central Bank has intervened occasionally 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.

 

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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 day during a monthly period and on the last day of each month during an annual period. The real/dollar exchange rate fluctuates and, therefore, the selling rate at April 23, 2021 may not be indicative of future exchange rates.

 

Year  Period-End  Average(1)  Low  High
2016    3.259    3.483    3.119    4.156 
2017    3.308    3.193    3.051    3.381 
2018    3.875    3.656    3.139    4.188 
2019    4.031    3.946    3.652    4.260 
2020    5.197    5.158    4.021    5.937 

 

Month  Period-End  Average(2)  Low  High
October 2020    5.772    5.626    5.521    5.780 
November 2020    5.332    5.418    5.282    5.693 
December 2020    5.197    5.146    5.058    5.279 
January 2021    5.476    5.356    5.163    5.509 
February 2021    5.530    5.416    5.342    5.530 
March 2021    5.697    5.646    5.495    5.840 
April 2021 (through April 23, 2021)    5.479    5.612    5.479    5.706 
 

Source: Central Bank.

 

(1)Represents the average of the exchange rates on the closing of each business day during the year.

 

(2)Represents the average of the exchange rates on the closing of each business day during the month.

 

B.Capitalization and Indebtedness

 

Not applicable.

 

C.Reasons for the Offer and Use of Proceeds

 

Not applicable.

 

D.Risk Factors

 

This section is intended to be a summary of more detailed discussions contained elsewhere in this registration statement. The risks described below are not the only ones we face. Our business, results of operations or financial condition could be harmed if any of these risks materializes and, as a result, the trading price of our common shares could decline.

 

Summary of 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.

 

·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.

 

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·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.

 

·Any change or review of the tax treatment of our activities, or the loss or reduction in tax benefits on the sale of books (including digital content) may materially adversely affect us.

 

·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.

 

·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 may not be able to appropriately manage the expansion of our business and staff, the increased complexity of our software and platforms, or grow in our addressable market.

 

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

 

·The quality of the pedagogical content we deliver to our clients is significantly dependent upon the quality of our editors, publishers and purchased content. Any issues related to obtaining this content or regarding the quality of this content may have an adverse effect on our business.

 

·If we lose key personnel our business, financial condition and results of operations may be 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.

 

·Public health threats or outbreaks of communicable diseases could have an adverse effect on our operations and financial results.

 

Summary of 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.

 

·Economic uncertainty and political instability in Brazil may harm us 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.

 

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

 

·Infrastructure and workforce deficiency in Brazil may impact economic growth and 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.

 

Summary of Risks Relating to Our Common Shares

 

·Our Controlling Shareholders’ ownership and voting power may limit your ability to influence corporate matters.

 

·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.

 

·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.

 

·We do not anticipate paying any cash dividends in the foreseeable future.

 

·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.

 

·As a foreign private issuer and an “emerging growth company” (as defined in the JOBS Act), we have different disclosure and other requirements than U.S. domestic registrants and non-emerging growth companies.

 

·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.

 

·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.

 

·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.

 

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.

 

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) vaccination programs; (2) recommendations to adopt

 

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voluntary isolation (avoid going out on the streets, avoiding crowds, avoiding physical contact with other people, etc.); (3) internal restrictions regarding the movement of people; (4) closing of schools and other public places, such as parks and leisure centers, as well as closures of shopping malls, bars and restaurants; (5) adoption of remote working practices (home office) by companies, whenever possible and permitted by their activities; (6) closing borders between countries; (7) 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); (8) purchase restrictions for certain essential items to avoid scarcity; (9) interruption of production activities of consumer items not essential to combat the pandemic; (10) restriction on the delivery of products to homes other than essentials; (11) compulsory reduction of working hours; (12) cancellation of public events; and (13) 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 in certain cities in 2020 and 2021, 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, such as vaccination campaigns, 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 mandatory closure of schools in 2020 and 2021 may result in delays in students enrollments in postsecondary education courses and, therefore, affect our future 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 mitigate its impact, among others.

 

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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 annual report. 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 annual report under the sections “Item 3. Key Information—D. 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 annual report 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.

 

See also “Item 4. Information on the Company—A. History and Development of the Company—Recent Events—COVID-19 Pandemic” and “Item 5. Operating and Financial Review and Prospects— Impact of COVID-19.”

 

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;

 

·faculty credentials;

 

·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.

 

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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 “Item 4. Information on the Company—B. Business Overview—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$519.2 million for the year ended December 31, 2020 and 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. As of December 31, 2020, 84.8% 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, 2020 and December 31, 2019, we had 188 and 151 hub partners, respectively. 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.

 

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Our hub partners are remunerated by their respective share represented by a given percentage over the tuition fee collected by us from students. The total amount to be transferred to the hub partners on a monthly basis is derived from the pricing terms agreed upon with each student on the service contract. This percentage is similar across all our partnership agreements and varies in accordance with the type of course the student is enrolled in, which are higher for continuing education courses and lower for undergraduate courses. In addition, this percentage is higher in the beginning of the hubs’ operations and decreases throughout their life cycle, thus reducing their payback period and increasing the attractiveness of their investment.

 

However, 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

 

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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 effective 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. The Brazilian federal government is currently seeking to reform Brazil’s tax system to improve Brazil’s economic performance. We cannot assure you that these proposed reforms will be successful or, if they are successful, that they will not result in an increase in our overall tax burden.

 

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 “Item 10. Additional Information—E. Taxation.”

 

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) IRPJ, (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) CSLL regarding our revenues from undergraduate and associate programs.

 

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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 “Item 4. Information on the Company—B. Business Overview—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.

 

Any change or review of the tax treatment of our activities, or the loss or reduction in tax benefits on the sale of educational materials may materially adversely affect us.

 

We started selling educational materials in March 2020. Accordingly, 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 Brazilian constitution exempts the sale of books 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 market 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.

 

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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”).

 

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 market.

 

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.

 

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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 as of December 31, 2016 to 545 as of December 31, 2019 and 709 as of December 31, 2020. 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 our initial public 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.

 

We are 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 (i.e., in 2022) 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.

 

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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, 2020, 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 condensed 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. Specifically, we did not design and maintain effective controls over: (i) information systems and associated infrastructure, including but not limited to (x) managing access to our systems, data and end-user computing (EUC) controls, and (y) computer operations controls; (ii) the financial reporting closing process, including revenue recognition, especially in relation to tax adjustments in connection with the ProUni program, and the procedures in existence to maintain formal accounting policies, processes and controls to analyze, account for and disclose complex transactions, especially in relation to the process of formal review of journal entries; and (iii) the accounting for stock-based compensation.

 

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 condensed consolidated financial statements that would not be prevented or detected, and, accordingly, we determined that these control deficiencies constitute material weaknesses.

 

In order to address these material weaknesses, we have adopted remediation plans, which we expect will contribute to improving our processes and internal controls environment.

 

Despite the fact that we are focused on implementing robust internal controls over financial reporting, 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. This is due to the high school calendar in Brazil in which classes conclude in December. In order to attract and encourage potential new students to enroll in our undergraduate courses later in the semester, we often offer discounts, generally equivalent to the number of months that have passed in the semester. As a result, we generally record higher revenue in the second and fourth quarters of each year. Revenue is also higher later in the semester due to lower dropout rates during that same period. See “Item 5. Operating and Financial Review and Prospects—A. Operating Results—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.

 

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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.”  

 

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

 

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

 

·attract and retain students, thus increasing the number of students of our educational programs;

 

·continue to introduce our educational programs to new markets;

 

·provide high quality support to students and hub partners using our products and services;

 

·expand our business and increase our market share;

 

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

 

·develop new educational programs, products, services, offerings and technologies;

 

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

 

·increase the positive perception of our brands, especially the “Uniasselvi” brand.

 

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

 

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

 

Our management may publicly announce quarterly and annual guidance related to our operating and financial results, and cash generation estimates based on management’s expectations and assumptions. To the extent that it does, we cannot guarantee that we will meet any such publicly announced quarterly or annual estimates, and our operating and financial results and cash generation in any one quarter should not be relied upon as indicative of our future performance. Our ability to meet our estimates may be affected by certain factors, including: (1) poor business performance due to flaws in our information technology, our operations or management; (2) competition from existing and future competitors that operate in the same sectors in which we operate and that may offer

 

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technological solutions, products and/or services that are more attractive than ours; (3) the absence of qualified professionals to execute our strategies in the short, medium and long term; and (4) other risks to which we are exposed to, as disclosed elsewhere in this annual report. If our actual operating, financial and cash generation results fail to meet any public guidance that we announce, the price of our common shares could decline in value and our shareholders’ equity may be adversely affected.

 

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

 

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. As of December 31, 2020, we do not carry any key man insurance against such risks.

 

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

 

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

 

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, 2020, payroll and social charge expenses represented 54.3%, sales and marketing represented 17.7%, materials represented 3.4%, lease payments represented 0.8% and utilities, cleaning and security costs represented 1.6% of our total costs and expenses, respectively. 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

 

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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.

 

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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 54.3% and 48.6% of such costs and expenses for the year ended December 31, 2020 and the year ended December 31, 2019, respectively. 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.

 

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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

 

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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 annual report, 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.

 

As of December 31, 2020, we experienced 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.

 

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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, officers and members of our management, among others, own shares in the Company and/or are beneficiaries under our share-based incentive plans. We implemented our first share-based incentive plan in 2017 and a second share-based incentive plan in 2020. 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) or the price of common shares, 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.

 

Our share-based incentive plans provide for the granting of stock options to participants. Once the options have been exercised by the participants, our board of directors will authorize a share capital increase by means of the issuance of new shares to be subscribed by participants. Our shareholders will suffer dilution of their interests in our issued share capital and in the value of their investments.

 

We have reserved up to 5.0% of our common shares for issuance under our equity incentive plans.

 

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 “Item 6. Directors, Senior Management and Employees—B. Compensation” for additional information.

 

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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.

 

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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.

 

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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 markets 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.

 

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

 

We rely and expect to continue to rely on a combination of trademark, copyright, patent and trade secret protection laws, as well as confidentiality 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 annual report, 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, 2020, we owned 29 trademarks. As of the date of this annual report, we owned 47 registered domain names in Brazil. We also have four 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

 

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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 non-infringing technology, including partially or fully revise any publication that infringes intellectual property rights, enter into licensing agreements, adjust our merchandising or marketing activities or take other actions to resolve the claims. These actions, if required, may be unavailable on terms acceptable to us or may be costly or unavailable. If we are unable to obtain sufficient rights or develop non-infringing intellectual property or otherwise alter our business practices, as appropriate, on a timely basis, our reputation or our brands, our business and our competitive position may be affected adversely and we may be subject to an injunction or be required to pay or incur substantial damages and/or fees and/or royalties.

 

Most of our services are provided using proprietary software, and our software is mainly developed by our employees, who do not specifically assign to us their copyrights over the software and we are unable to assure 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.

 

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

 

Although our hub partners are spread across the country and the education market in Brazil is extremely fragmented, which reduces the capacity of the hub partners to organize themselves and reduces the bargaining power of individual hub partners, groups of hub partners could organize as blocs or syndicates in an attempt to negotiate greater contractual benefits. If our hub partners organize themselves as blocs in an attempt to negotiate greater contractual benefits, we would be required to devote additional resources to contract negotiations and could face additional challenges in dealing with our hub partners. We could be forced to offer higher percentage over the tuition fee collected by us from students to hub partners or provide other contractual benefits in an effort to maintain and expand our market share. If we lose bargaining power with our hub partners, we cannot guarantee that we will be able to charge students at profitable prices, which would adversely affect our business, financial condition and results of operations.

 

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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 Controlling 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 and has been built in accordance with the project specifications approved by such municipality. 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 ability to attract and retain students as well as 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.

 

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We are currently in the process of registering and annotating 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 and annotated with the applicable real estate registry offices. We may be delayed in registering and annotating 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 annotated in the property’s real estate records. If the lease is not annotated, 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 and the lessee does not exercise its right of first refusal, 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, unless (i) the term of the lease is specified in the lease agreement; (ii) the lease agreement contains an effectiveness clause that provides for the maintenance of the terms and conditions of the lease in the event of a transfer of the leased property; and (iii) the lease agreement is duly registered in the real estate records of the leased 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 annual report, 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 equal to or 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.

 

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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, 2020 and December 31, 2019, our total consolidated indebtedness (consisting of lease liabilities, accounts payable from acquisition of subsidiaries and a loan agreement with Banco Santander (Brasil) S.A.) was R$576.0 million and R$482.7 million, respectively. 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 “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources.”

 

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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 our subsidiaries’ financial results, and we may be adversely affected if the performance of our subsidiaries is not positive or if the Brazilian government imposes taxes or restrictions on the distribution of dividends or interest on shareholders’ equity by subsidiaries to parent companies.

 

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,” “—Risks Relating to Brazil —Economic uncertainty and political instability in Brazil may harm us and the price of our common shares” and “Item 8. Financial information—A. Consolidated statements and other financial information—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.

 

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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. 12,846/2013, the Brazilian Federal Decree No. 8,420/2015, the Brazilian Decree-Law No. 2,848/1940, the Brazilian Law No. 9,613/1998, the Brazilian Law 8,666/1993, the Brazilian Law No. 8,137/1990, to the Brazilian Law No. 8,429/1992, the Brazilian Federal Decree No. 3,678/2000, the Brazilian Federal Decree No. 4,410/2002, 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

 

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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 LGPD, 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.

 

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In 2018, the Brazilian Law No. 13,709/2018 (Lei Geral de Proteção de Dados, or the “LGPD”), a comprehensive data protection law, has been enacted establishing the general principles and obligations that apply across multiple economic sectors and contractual relationships. The LGPD lays down detailed rules for the collection, use, processing and storage of personal data, regardless of whether data is collected in a digital or physical environment. As a result of enactment of Provisional Measure No. 959 (Medida Provisória n.º 959) (“MP 959”), dated April 29, 2020, the LGPD came into force on September 18, 2020, except for Articles 52, 53 and 54 of the LGPD, which address administrative penalties, and which are scheduled to come into force on August 1, 2021.

 

On November 6, 2020, the Brazilian Decree No. 10,474 of August 26, 2020, which regulates the organizational structure of the National Data Protection Authority (Autoridade Nacional de Proteção de Dados), or ANPD, came into force, and ANPD`s first board of directors was appointed. This is the entity responsible for regulating and supervising the application of the LGPD as well as imposing sanctions in the event of noncompliance with the legal rules and obligations.

 

We may incur penalties due to violation of the LGPD. If we are not able to adapt our processes and implement the measures required for full compliance with the LGPD, we may in the future be subject to administrative penalties by the ANPD, as set forth in the law, including, but not limited to (i) legal notices and the required adoption of corrective measures, (ii) fines up to 2% of the company’s or group’s revenues up to a limit of R$50.0 million per infraction, (iii) publication of the infraction after the confirmation of its occurrence, and (iv) blocking and erasing the personal data involved in the infraction. In the event of repeated violations, more severe penalties may be imposed on us, such as suspension of the operation of the database or personal data processing to which the violation refers for a maximum period of six months, which may be extended for an equal period of time, until the error giving rise to the violation is rectified by the controller and prohibition in whole or in part from carrying out data processing activities. Despite the fact that the administrative sanctions detailed above will be effective as of August 2021, other authorities in Brazil could still apply the LGPD through administrative procedures or lawsuits. The Department of Consumer Protection and Defense (Procon) or the Public Ministry responsible for consumer rights and individuals and non-governmental or private associations, for example, could file complaints or bring lawsuits based on violations of the LGPD that have caused or may cause harm to individuals. In this sense, we may be liable for property, moral, individual or collective damages caused by us, including by third party providers that process personal data for us, and jointly liable for property, moral, individual or collective damages caused by our subsidiaries, due to non-compliance with the obligations established by the LGPD. If we are unable to use sufficient measures to protect the personal data we manage and store or to maintain compliance with the LGPD, we may incur material costs which could have an adverse effect in our reputation and results of operations. 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.

 

Pursuant to the LGPD, 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 LGPD 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.

 

The scope of data privacy and security regulations continues to evolve, and we believe that the adoption of increasingly restrictive regulations in this area may be likely within the jurisdictions in which we operate. Compliance with data privacy and security restrictions could increase the cost of our operations and failure to comply with such restrictions could subject us to criminal and civil sanctions as well as other penalties.

 

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Further, as a consequence of the COVID-19 pandemic, most of our employees are working remotely from home. Based on thorough assessments of the well-being and performance of our workforce, our management announced the company-wide adoption of the home-office model. This may cause increases in the unavailability of our systems and infrastructure, interruption of telecommunication services, generalized system failures and heightened vulnerability to cyberattacks. Accordingly, our ability to conduct our business may be adversely impacted.

 

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:

 

·the ongoing COVID-19 pandemic, the Brazilian government’s response to the COVID-19 pandemic, and the effects of the COVID-19 pandemic and the government’s response to it on the economic, social and political situation in Brazil;

 

·growth or downturn of the Brazilian economy;

 

·interest rates and monetary policies;

 

·exchange rates and currency fluctuations;

 

·inflation;

 

·liquidity of the domestic capital and lending markets;

 

·import and export controls;

 

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

 

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

 

·fiscal policy and changes in tax laws;

 

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

 

·the regulatory framework governing the educational industry;

 

·labor and social security regulations;

 

·energy and water shortages and rationing;

 

·commodity prices;

 

·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.

 

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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 “Item 5. Operating and Financial Review and Prospects—A. Operating Results—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 caused, among others, by the COVID-19 pandemic, the increase in inflation recorded in recent years, the slowdown in GDP and the uncertainty about whether the Brazilian federal government will be able to enact the economic reforms necessary to improve the deterioration of public accounts and the economy, has led to a decline in market confidence in the Brazilian economy and a crisis in the government, generating an adverse effect on the valuation of Brazilian assets, which culminated in the need for the Brazilian stock exchange (B3 S.A. — Brasil, Bolsa, Balcão) to trigger the circuit-breaker eight times in March 2020. The Brazilian government may be subject to internal pressure to change its current macroeconomic policies in order to achieve higher rates of economic growth. We cannot predict what policies will be adopted by the Brazilian government. Uncertainty regarding the implementation of changes by the Brazilian government in policies or regulations may contribute to economic uncertainty in Brazil and greater volatility for the Brazilian securities markets and securities issued abroad by Brazilian companies.

 

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 adversely affected the Brazilian economy and political environment. The potential outcome of these investigations is uncertain, but they have already had an adverse impact on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy. We cannot predict whether the ongoing investigations will result in further political and economic instability, or if new allegations against government officials and/or executives of private companies will arise in the future.

 

Additionally, during 2020, the current Brazilian President became involved in controversial political discussions that culminated in the dismissal or resignation of certain government ministers and other high ranking officials, including the dismissal of the Minister of Health, Luiz Henrique Mandetta, the resignation of the Minister of Justice, Sergio Moro, the resignation of the Minister of Defense, Fernando Azevedo e Silva, and the resignations of the heads of the Brazilian Army, Brazilian Navy and Brazilian Air Force . Such former ministers and officials were considered important figures within the current Brazilian 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 annual report, 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. In addition, the President is also being investigated by an inquiry commission within the Brazilian Senate for his handling of the COVID-19 pandemic. 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.

 

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. In addition, the Brazilian government is incurring significant levels of debt to finance measures to combat the COVID-19 pandemic, which is expected to increase the Brazilian budget deficit. Any such developments may have a material adverse impact on our business, results of operations, financial condition, and prospects.

 

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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.

 

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 a 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.

 

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 4.52%, 4.31% and 3.75% for the years ended as of December 31, 2020, 2019 and 2018, 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 2.00% on December 31, 2020. This rate is set by the

 

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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%, 3.00%, 2.25% and then 2.00%. As of the date of this annual report, the SELIC rate target was 2.75%. Conversely, more lenient government and Brazilian 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 U.S.$1.00 on December 30, 2016, an appreciation of 16.5% against the rate of R$3.9048 per U.S.$1.00 reported on December 31, 2015. In 2017, the real depreciated by 1.5%, with the exchange rate reaching R$3.308 per U.S.$1.00 on December 29, 2017. In 2018, the real depreciated an additional 17.1%, to R$3.875 per U.S.$1.00 on December 31, 2018. The real/U.S. dollar exchange rate reported by the Brazilian Central Bank was R$4.0307 per U.S.$1.00 on December 31, 2019, which reflected a 4.0% depreciation of the real against the U.S. dollar during 2019. The real/U.S. dollar exchange rate reported by the Brazilian Central Bank was R$5.197 per U.S.$1.00 as of December 31, 2020, which reflected a depreciation of 28.9% 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 and decreased by 4.1% in

 

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2020. 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 had a referendum in which the majority voted 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 withdrew from the European Union on January 31, 2020. On December 24, 2020, the United Kingdom and the European Commission reached an agreement on the terms of its future cooperation with the European Union. The UK-EU Trade and Cooperation Agreement was signed on December 30, 2020, between the European Union, the European Atomic Energy Community and the United Kingdom. It has been applied provisionally since January 1, 2021, when the transition period ended. Nevertheless, there continues to be significant political and economic uncertainty remains about whether the terms of the future relationship between the United Kingdom and the European Union. 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 Nasdaq. The price of our common shares may be affected by this volatility. See “Item 3. Key Information—D. 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 “Item 3. Key Information—D. 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.”

 

These developments, as well as potential crises and forms of political instability arising therefrom or any other 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.

 

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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.

 

·On April 7, 2020 and May 6, 2020, S&P and Fitch, respectively, changed their outlook on sovereign credit risk rating of Brazil to negative.

 

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

 

Our Controlling Shareholders’ ownership and voting power may limit your ability to influence corporate matters.

 

Our Controlling Shareholders control our company and own 53.71% of our issued share capital. As a result, our Controlling Shareholders control certain of the decisions at our shareholders’ meetings, and are able to elect the members of our board of directors, and are able to direct our actions in areas such as business strategy, financing, distributions, acquisitions and dispositions of assets or businesses. For example, our Controlling 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 Controlling Shareholders’ decisions on these matters may be contrary to your expectations or preferences, and our Controlling Shareholders may take actions that could be contrary to your interests. Our Controlling Shareholders will be able to prevent any other shareholders, including you, from blocking these actions. For further information regarding shareholdings in our company, see “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.”

 

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.

 

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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.

 

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 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 “Item 16G. Corporate Governance—Principal Differences between Cayman Islands and U.S. Corporate Law.”

 

Furthermore, the Cayman Islands has recently enacted the International Tax Co-operation (Economic Substance) Act (As Revised), or the Cayman Economic Substance Act. We are required to comply with the Cayman Economic Substance Act. 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 Act. As it is a new regime, it is anticipated that the Cayman Economic Substance Act 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 Act. Failure to satisfy these requirements may subject us to penalties under the Cayman Economic Substance Act.

 

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As a foreign private issuer and an “emerging growth company” (as defined in the JOBS Act), we have different disclosure and other requirements than U.S. domestic registrants and non-emerging growth companies.

 

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 our initial public offering, (b) in which we have total annual revenues of at least U.S.$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 U.S.$700.0 million as of the most recently completed second fiscal quarter, or (2) the date on which we have issued more than U.S.$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

 

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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 U.S.$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 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 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 “Item 16G. Corporate Governance—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 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 Act 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 established as they would be under statutes or judicial precedent in some 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.

 

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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 annual report;

 

·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 have on its overall investment portfolio;

 

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·have sufficient financial resources and liquidity to bear all of the risks of an investment in our 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 2021 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 2021 or any future year is uncertain because, among other things, (i) we hold a substantial amount of cash following our initial public offering, which is generally 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 “Item 10. Additional Information—E. Taxation.”

 

Item 4. Information on the Company

 

A.History and Development of the Company

 

Our History

 

We have a 20-year unparalleled history of growth among the largest digital education players in Brazil, throughout which we have been able to consistently improve our hybrid education model in several phases.

 

Uniasselvi was founded in 1999 as a college in Indaial, in the state of Santa Catarina, in the southern region of Brazil. Up until 2004, we operated primarily in the surrounding region as a local group of integrated institutions that provided traditional on-campus postsecondary education courses. In that year, we were granted the status of university center, a credential given by the MEC to postsecondary education institutions, as a result of which we achieved greater academic autonomy to offer new courses and research programs in multiple academic subjects.

 

We were accredited by the MEC to offer digital education courses in 2006. Since then, our disruptive student-centric model has been taking advantage of technology to make the postsecondary education learning process more accessible and affordable. As a consequence of our differentiated value proposition, we were able to achieve a regional leadership position in the south of Brazil and become a well-recognized brand nationwide.

 

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In 2016, we were acquired by Carlyle and Vinci Partners and we appointed a new executive team with extensive experience and a strong track record in the education industry. Our strategic focus was fully directed to the expansion of our digital education operations across Brazil.

 

Our expansion strategy was accelerated by the new regulatory framework for distance learning in 2017, which is centered on postsecondary education institutions’ achievements in a quality index. This new regulatory framework has made it easier to open new hubs, thereby unlocking a major market opportunity. In that year, we worked together with a well-recognized consulting firm to develop a robust expansion plan, which mapped several opportunities to be captured in the following five years. In addition, we have created a new business intelligence unit to support intake cycles and our marketing strategy.

 

In 2018, we became the leading pure digital education player in Brazil, according to the MEC.

 

In 2019, our CI score, which is measured and reported by the MEC using institutional planning and development, academic and management criteria, was upgraded to the maximum grade of 5, from a previous score of 4.

 

In September 2020, we completed our initial public offering on the Nasdaq, through which we raised U.S.$96 million in total proceeds. We intend to use the proceeds of our initial public offering primarily to fund inorganic growth opportunities.

 

In October 2020, the most recent postsecondary education census by the MEC, covering data for 2019, was released. According to the latest available data published in October 2020 by the MEC, we are the leading pure distance learning education group in the postsecondary digital education market in Brazil, based on the number of enrolled undergraduate students as of December 31, 2019, for the second consecutive year.

 

As of December 31, 2020, we operate 709 hubs with a student base of 256,953 digital education undergraduate students. As illustrated by our CI score, we grew our hubs and student base while increasing quality.

 

 

 
Note:The data presented in this chart for the period from 2010 to 2019 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 annual report.

 

Our Pre-IPO Corporate Reorganization

 

Prior to our initial public offering we undertook a corporate reorganization as described under “Presentation of Financial and Certain Other Information—Corporate Events.”

 

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Recent Events

 

COVID-19 Pandemic

 

We are closely monitoring the situation of the COVID-19 pandemic, and taking the necessary measures for the safety and well-being of our employees, students, associates and partners. The COVID-19 pandemic continues to present material uncertainty and risk with respect to our future performance and financial results. In particular and in the interest of public health and safety, state and local governments in certain parts of Brazil have required temporary mandatory school closures, which has resulted in the closure of on-campus learning facilities and hubs.

 

In response to the outbreak, we have implemented several measures aimed at safeguarding the health of our employees, students and hub partners as well as the stability of our operations. These measures include: (1) creating a crisis management committee and a financial committee to discuss the action plan for our organization to address the challenges posed by the COVID-19 pandemic; (2) temporarily replacing in-person weekly meetings with dedicated tutors at the hubs with online meetings between students and the same tutors across all of our hubs, as a result of which since March 30, 2020 all of our students have had real-time meetings with their dedicated tutors; (3) training teachers, tutors and hub partners to support students in this new format; (4) remote support to deliver high-quality content to our students and maintain high levels of engagement and a superior learning experience; (5) making no changes to our course schedule or curriculum; (6) putting in place remote emotional and psychological support to students and employees, provided by our psychology department; and (7) making home office available for all of our employees.

 

We have also been involved in corporate social responsibility initiatives to help the communities in which we are active and are affected by the COVID-19 pandemic. To that end, we have set up a portal that provides tips on how to make masks, free online courses, psychological support services, tips for micro entrepreneurs, and suggestions for children’s games to be played during times of social distancing, among others. Our objective is to take advantage of the knowledge pool within our organization to support people who are confined at home and help society face the COVID-19 pandemic.

 

Due to uncertainties related to the dynamics of COVID-19’s spread, the effects on the economic activities on our customers and suppliers and the measures to be adopted in Brazil, it is impossible to predict the impact the pandemic will have on the global economy, as well as on our business. The extent of the impact of COVID-19 on our operational and financial performance will depend on certain developments, including the duration and spread of the outbreak and its impact on students, hub partners and employees, all of which are uncertain and cannot be predicted.

 

As of the date of this annual report, there has been no material impact on our operations, as most of our services were already delivered remotely (distance learning undergraduate courses and most continuing education courses) or capable of being delivered remotely (some of our continuing education courses and on-campus undergraduate courses). In addition, based on information available as of the date of this annual report:

 

·There was no relevant impact on our revenue for the year ended December 31, 2020, which was slightly below our expectations for the year but nevertheless increased by 13% when compared to the prior year. Student defaults have remained within the expected levels and the engagement of students, compared to 2019, has only deteriorated slightly.

 

·Our provision for expected credit losses increased as a result of the methodology used which captures the increase in historical losses with receivables during 2020, which, as a consequence, already reflects the impact of the COVID-19 pandemic.

 

·We assessed the existence of potential indicators of impairment and the possible impacts on the key assumptions and projections caused by the pandemic on the recoverability of long-lived assets (i.e., impairment tests) and concluded that no additional provision for impairment of long-lived assets needed to be recorded in our audited consolidated financial statements.

 

·We have obtained rent concessions on lease contracts due to the temporary suspension of classes in the on-campus learning facilities and hubs caused by the mandatory school closures during the pandemic. A gain of R$2.0 million was recognized as Other income (expenses), net, in the statement of profit and loss for the

 

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year ended December 31, 2020. Except for these concessions, there were no changes to contractual obligations regarding leased buildings and there were no changes in the expected useful life and residual amount of properties and equipment as a result of COVID-19.

 

·No changes in the provision for contingencies against us were identified as a result of COVID-19.

 

·As an incentive for our students to keep their payments of tuition fees up to date, we granted an additional discount of 5% to students that payed their tuition fees by the due date in April and May 2020. The amount of additional discounts granted was R$4.0 million.

 

·As of December 31, 2020, we have sufficient working capital and other undrawn financing facilities to service our operating activities and ongoing investments.

 

·We have also taken advantage of the emergency employment and income preservation benefit program (Programa Emergencial de Suporte a Empregos) by the Brazilian federal government. The Brazilian federal government offered the option of either reducing workload and salary payment for up to three months or suspending employment contracts for up to two months in exchange for employers guaranteeing they will retain the employee after the suspension for a period equivalent to that during which the contract was suspended. We suspended 195 employment contracts from May to September 2020.

 

Nevertheless, if the COVID-19 pandemic or the resulting economic downturn continues to worsen, we could experience reduced business activity or higher levels of allowances for doubtful accounts, which could have a material adverse effect on our business, results of operations, cash flows and financial condition. We will continue to actively monitor the situation and may take further actions that alter our business operations as may be required by federal, state or local authorities, or that we determine are in the best interests of our employees, students, hub partners and shareholders.

 

For further information, please see “Item 3. Key Information—D. 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,” “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” and “Item 5. Operating and Financial Review and Prospects—A. Operating Results—Impact of COVID-19.”

 

Corporate Information

 

We are a Cayman Islands exempted company incorporated with limited liability. We were incorporated as Vitru Limited on March 5, 2020. Our principal executive offices are located at Rodovia José Carlos Daux, 5500, Torre Jurerê A, 2nd floor, Saco Grande, Florianópolis, in the state of Santa Catarina, 88032-005, Brazil. Our legal name is Vitru Limited and our commercial name is “Vitru” or “Uniasslelvi.” Our telephone number at our principal executive offices is +55 (47) 3281-9500. Our principal website is www.vitru.com.br. The information that appears on our website is not part of, and is not incorporated into, this annual report.

 

Investors should contact us for any inquiries through the address and telephone number of our principal executive office. Our principal website is www.vitru.com.br. The information contained in, or accessible through, our website is not incorporated into this annual report.

 

B.Business Overview

 

Our Mission

 

Our mission is to democratize access to education in Brazil through a digital ecosystem and empower every student to create their own success story.

 

Postsecondary education students in Brazil have been facing several challenges, including (1) high tuition fees with few to no 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.

 

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We believe that the future of postsecondary education consists of a combination of quality, engagement, flexibility, affordability, technology and innovation. We believe that by incorporating all these elements into our value proposition, we not only provide an unparalleled hybrid learning experience for our students in their academic journey, but also help them to increase their professional opportunities, which translates into higher employability levels and wages.

 

Overview

 

According to the latest available data published in October 2020 by the MEC, we are the leading pure distance learning education group in the postsecondary digital education market in Brazil, based on the number of enrolled undergraduate students as of December 31, 2019, for the second consecutive year.

 

We provide a complete pedagogical ecosystem focused on hybrid digital education experience for undergraduates and continuing education. We provide course offerings in over 300 subjects through our Virtual Learning Environment, or VLE, which is delivered in multiple formats (videos, eBook, podcasts and html text, among others). We have already developed over 8.5 terabytes of digital content and approximately 1,673 hours of educational videos to serve as online course materials. Our model also incorporates in-person weekly meetings hosted by our tutors who are mostly local working professionals in the subject area they teach. We have over 3,500 tutors who were all hired and trained by us in order to ensure they meet our quality requirements. 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.

 

At the core of our ecosystem are our digital education centers, or hubs, which offer in-person tutoring, supported by virtual mentoring. We operate our hubs mainly through joint operations in a scalable partnership model based on symbiotic, financially aligned and self-reinforcing relationships with our hub partners, who manage day to day operations and financial planning. Approximately 84.8% of our hubs are managed by hub partners and we have built and nurtured strong relationships with our 188 hub partners, who play a key role in our expansion.

 

We have one of the largest nationwide digital education footprints in Brazil, driven by an asset-light, highly scalable and profitable business model that maintains resiliency through macroeconomic cycles. Our learning methodology and technology-enabled online educational platform enable us to deliver affordable content digitally and through hubs with in-person and virtual mentoring. Our hybrid platform and unique offerings lead to higher retention rates than our competitors and supports our growth strategy. We expect our ecosystem to include a lifelong postsecondary education journey with a growing offering of undergraduate and continuing education programs, in which we will leverage students’ learning methods, performance and interests as data to drive tailored and engaging educational solutions.

 

We have an asset-light, highly scalable and profitable business model that maintains resiliency through macroeconomic cycles, with a tech-enabled value proposition for all stakeholders. Our revenue is driven primarily by tuition fees charged for digital education undergraduate courses. Although we focus on undergraduate digital education courses, we also offer digital continuing education and certain on-campus undergraduate courses. We operate mainly through joint operations in a scalable partnership model with strong cash flow generation. Our hub partners are remunerated by their respective share represented by a given percentage over the tuition fee collected by us from students. The total amount to be transferred to the hub partners on a monthly basis is derived from the pricing terms agreed upon with each student on the service contract. This percentage is similar across all our partnership agreements and varies in accordance with the type of course the student is enrolled in, which are higher for continuing education courses and lower for undergraduate courses. In addition, this percentage is higher in the beginning of the hubs’ operations and decreases throughout their life cycle, thus reducing their payback period and increasing the attractiveness of their investment. 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 to our hub partners.

 

As of December 31, 2020, our network consisted of 709 hubs, compared to 545 hubs as of December 31, 2019 representing an annual growth rate of 30.1%. As of December 31, 2018, our network consisted of 370 hubs, compared to, respectively, 221 hubs and 72 hubs as of December 31, 2017 and December 31, 2016, representing a

 

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compound annual growth rate, or CAGR, of 77.1%. Approximately 88.3% of our hubs have been opened in the last three years, or since the second half of 2017, and are still ramping up, representing a substantial opportunity for growth.

 

As of December 31, 2020, we had 309,560 enrolled students across all Brazilian states, compared to 240,946 students as of December 31, 2019 representing an annual growth rate of 28.5%. As of December 31, 2018, we had 189,295 enrolled students, compared to 140,363 enrolled students as of December 31, 2017 and 115,325 enrolled students as of December 31, 2016, representing a CAGR of 28.0%.

 

We believe that the characteristics of our platform, together with proven academic outcomes, a differentiated student experience and the highest quality standards measured by Institutional Concept score, or CI score, have driven our significant growth, allowing us to quickly and efficiently cement our leadership across Brazil in digital education.

 

Our business model has allowed us to successfully grow since our foundation, with 88.3% of our hubs still ramping up. In the year ended December 31, 2020, we generated R$519.2 million of net revenue, compared to R$461.1 million in the year ended December 31, 2019, representing an increase of 12.6%. In the year ended December 31, 2020, we generated R$52.1 million of net income, compared to a R$66.2 million of loss in the year ended December 31, 2019, representing an increase of R$118.3 million. In the year ended December 31, 2020, we generated R$146.7 million of Adjusted EBITDA, compared to R$117.6 million of Adjusted EBITDA in the year ended December 31, 2019, representing an increase of 24.7%. In the year ended December 31, 2020, we generated R$98.2 million of Adjusted Net Income, compared to R$57.7 million of Adjusted Net Income in the year ended December 31, 2019, representing an increase of 70.2%.

 

For information on how we define Adjusted EBITDA and Adjusted Net Income, see “Presentation of Financial and Other Information.” For a reconciliation of Adjusted EBITDA and Adjusted Net Income, see “Selected Financial and Other Information.”

 

Our Markets

 

Education is a priority in Brazilian families’ budget allocation preferences, given that a postsecondary education degree increases a student’s average salary by 65.3%, according to Educa Insights. Brazil ranks as the third largest private postsecondary education market in the world, only behind India and China, according to INEP and UNESCO. According to the MEC, there were more than eight million students enrolled in postsecondary undergraduate courses as of December 31, 2019, 75.8% of whom were enrolled in private institutions. However, only 21.0% of the population between the ages of 25 and 34 in Brazil attend postsecondary education institutions, which is well below the OECD average of 44.0%, based on a survey performed by OECD and released in September 2020, with respect to the year of 2018, which we believe shows potential for growth.

 

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 37.4% in 2019. To reach this rate, the Brazilian government has enacted market friendly regulations to promote digital education courses, mainly due to the affordability of these courses.

 

We believe that due to its higher flexibility, lower tuitions and improved quality, the digital education business will be the main driver of the expected increase in Brazil’s postsecondary education penetration rate. The digital education business has consistently gained share over the on-campus business for the past 10 years. According to MEC, over 6.5 million students are enrolled in private undergraduate courses in 2019, approximately 2.3 million students, or 35.1% of the student base, were enrolled in digital education courses. This compares to approximately 749,000 students in 2010, or 15.8% of all students. According to a study conducted by Educa Insights, the percentage of students who enroll in digital education courses is expected to surpass the enrollments in on-campus by 2023.

 

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However, we believe that the COVID-19 pandemic has accelerated the natural digital transformation in the sector, bringing a virtual learning experience to all students and further supporting the trends described elsewhere in this annual report. Furthermore, the percentage of students who enroll in digital education courses is now expected to surpass the enrollments in on-campus courses as soon as 2022.

 

This is principally due to: (1) decreasing income levels and rising unemployment rates in Brazil due to the impact of COVID-19, which has led students to opt for more affordable courses, such as digital education, and (2) the continuous migration to the digital environment during periods of social distancing. In addition, according to Educa Insights, between April and June 2020, 91% of students demonstrated interest in enrolling in digital education while only 42% of students demonstrated an intention to enroll in on-campus courses.

 

In addition, distance learning represents an even higher share of new enrollments, at 51% of total new private enrollments in 2019 (a level which has been above 17% since 2008).

 

 

Key Challenges Faced by Postsecondary Education Students in Brazil

 

The vast majority of students in Brazil struggle to have access to quality postsecondary education: public institutions are difficult to access given the highly competitive admissions process. Additionally, when students seek on-campus private alternatives, they face several constraints, such as high tuition costs with limited financing alternatives, commuting challenges, limited flexibility, teachers and tutors who fail to engage with students and low-quality content and materials.

 

Key Market Trends in Digital Education and Market Opportunities

 

A key reason for pursuing a postsecondary education degree in Brazil is the financial outcome for the future employee. For example, students who completed K-12 education present an employability index of 47.1%, while students who completed postsecondary education and a graduate program present an employability index of 78.8% and 91.0%, respectively, according to Educa Insights. A postsecondary education degree increases students’ average salaries by 65.3% and a graduate degree further increases students’ average salaries by an additional 51.9%, according to the same report by Educa Insights.

 

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We believe that digital education is an alternative that addresses the abovementioned issues. Tuition for distance-learning courses is approximately one-third of on-campus tuition given its scale and leaner cost structure. This lower cost, combined with the fact that distance-learning programs reduce the time and geographic limitations involved in attending postsecondary education, makes digital education accessible to a wide range of students.

 

According to the 2019 Postsecondary Education Census by the MEC, total on-campus private undergraduate enrollments fell 5.8% in 2019, while total distance learning private undergraduate enrollments grew 21.7%, boosted by the affordability of tuition and the flexibility of distance learning education. At this rate, the aggregate distance learning student base is expected to reach 49.3% of the total student base by 2023, according to Educa Insights.

 

Also according to Educa Insights, the acceptance of distance learning among students has considerably improved in Brazil in the past four years. In 2017, 81.1% of the overall student base spontaneously intended to take on-campus courses, compared to 14.5% for distance learning. As of February 2020, however, the percentage of the overall student base who intend to enroll in on-campus courses had decreased to 62.8%, compared to 31.6% for distance learning. With an increase of 17.1 percentage points, the acceptance rate for distance learning has more than doubled within four years.

 

 

We believe the world is changing, and postsecondary education has to stay ahead of the curve and be ready to accommodate students’ needs and demands. Traditional methodologies are outdated, and students are not looking for pure on-campus or pure online education. Accordingly, we believe that our hybrid model is the best solution.

 

We believe that the compelling strength of our business model and our strong growth prospects are supported by clear underlying market and industry trends, including:

 

·increasing demand for undergraduate courses, with accelerated growth of digital education;

 

·increasing number of courses offered through digital education (deregulation);

 

·higher relevance of hybrid experience for students, combining the best of digital education with the hand-holding support provided by local tutors;

 

·increasing demand for education technologies to improve students’ experience;

 

·gradual blurring of intersections of online education and viral content;

 

·extension of postsecondary education journey through graduate and continuing education courses; and

 

·budget allocation priorities.

 

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Our Disruptive Student-Centric Model

 

We believe that by incorporating quality, engagement, flexibility, affordability and innovation into our value proposition in a differentiated manner, we provide a hybrid learning experience for our students. In this context, postsecondary education students in Brazil need alternatives that are not only more affordable and flexible, but also provide a quality education with real-person interactions throughout the learning process. This is why our goal is to democratize access to education through digital education in Brazil and empower every student to create their own success story.

 

Hybrid Model

 

Our value proposition differentiates us from other players in the Brazilian market, as we address what students value the most by providing a personalized student experience which combines the advantages of digital education and on-campus education. We believe our hybrid model incorporates the flexibility of online learning when and wherever appropriate, while also giving students the opportunity to network and to experience a sense of belonging through frequent interactions with tutors and other classmates during weekly meetings. According to a survey conducted by Educa Insights in December 2019, the majority (51.3%) of our students feel that the weekly in-person meetings are the most important feature in our model. Traditional digital education providers are either 100% online, requiring students to be present at hubs only for final exams, or rely on video conferences for classes, which can be live or prerecorded and are broadcast to students collectively. We believe that these methods create environments that lack proximity, personalized student support and interactions with other students and tutors, which ultimately lead to low engagement and high dropout rates.

 

Superior Product Offering

 

We provide four different digital education offerings, which are tailored for each type of course and to provide flexibility to students. They are:

 

·Hybrid digital education: our core product, which consists of one weekly in-person meeting with dedicated local tutors;

 

·Hybrid digital education double: specific to engineering and some health-related courses, which consists of two weekly in-person meetings;

 

·Flex: the first year of the course is given in the hybrid digital education format and the subsequent years are fully online. More recently, we launched a new flex course offering which allows tutors to assist classes formed by students from anywhere in Brazil in the same virtual lab. Through this format, we can serve smaller regions where demand is insufficient to form a class of a specific course; and

 

·100% Flex: The entire course is given in a fully online format.

 

Our digital education undergraduate courses follow an academic structure based on modules, with each module consisting of five subjects that last a month (or four weekly meetings). We ensure that every student has a thoughtful, personalized and full academic experience with networking opportunities, a sense of belonging and flexibility, which allows maximum engagement, performance and development. Our modular structure also allows for better classroom utilization between different semesters and courses, resulting in a more efficient management of our student/class ratio.

 

Our flipped classroom methodology gives the best of both in-person and virtual resources to our students to facilitate the learning process. Students have access to all the course materials online in multiples formats (videos, eBook, podcasts and html text, among others), as well as to online tutors. The in-person meetings provide an opportunity for students to improve their understanding of the subject through discussion, activities and explanations from the local dedicated tutor.

 

Classes include four in-person meetings at our hubs, which have up to 40 students per class and are organized as follows:

 

·First meeting: The first in-person meeting is primarily intended to introduce the course’s content and learning objectives. Students are also introduced to the Unit 1 content and first activities and are encouraged to use our VLE inside and outside the classroom. As part of our hybrid content delivery method, we also display introductory videos for both the course and the unit;

 

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·Second meeting: The second in-person meeting begins as an open space for students to ask questions and discuss Unit 1’s content. We then provide general explanations regarding Unit 2 content and activities, and present an introductory video. We also assess students on their understanding of Unit 1. This assessment accounts for 15% of a student’s final grade;

 

·Third meeting: The third in-person meeting follows the structure of the second meeting, providing an open space for students to ask questions and discuss the previous unit’s content, followed by general explanations regarding Unit 3 content and activities, and the presentation of the introductory video. We also assess students on their understanding of Unit 2. This assessment accounts for 15% of the final grade; and

 

·Fourth meeting: The fourth and last in-person meeting also allows an open space for students to ask questions and discuss the previous unit’s content. This is followed by a review of the course’s full content and the final course exam which covers all four units and accounts for 70% of the final grade.

 

Additionally, we give our students the opportunity to take 100% online cross-disciplinary courses offered from the fourth module onwards. These courses enhance our students’ skills beyond the classroom and help prepare them for the labor market, by focusing on soft and 21st century skills, current global topics and support for tests needed for government procurement jobs in Brazil. We have been developing our methodology not only to support our students in their academic journey, but also increasingly in their professional endeavors.

 

Given that most of our students attended low-quality public secondary schools, we offer support to help them compensate for possible learning deficiencies with online classes. We make available modules covering basic school subjects, such as the Portuguese language and mathematics, which can be taken concurrently with the undergraduate course.

 

Tutor-Based Model

 

We believe that our local, on-site dedicated tutors are a key part of the success of our model. Our tutors are available not only during the weekly meetings, but also online to assist each student individually with their learning, to provide attentive guidance for their studies and activities and answer any questions that students may have.

 

Our tutors are local experienced professionals who work in their areas of expertise. We believe that the fact that our tutors are employed in professions relating to the matters which they teach gives them practical business insights (e.g., an accountant who takes a part-time job as a tutor to support undergraduate accounting students). We believe that the relationship between student and tutor is very important. Our local tutors are part of the community and face the same reality and conditions as our students, which paves the way for a close relationship and gives tutors the ability to play a fundamental role in the development of our students inside and outside the classroom.

 

We believe that the relationship between the student and the tutor is very important. Our local tutors are part of the community and face the same reality and conditions as our students, which paves the way for a close relationship. Each of our tutors accompanies their students throughout the whole course, across all modules, supported by a data-oriented methodology that enables them to measure and manage students’ learning experience in a single, exclusive digital platform that provides insights on performance, enrollments, grades, dropouts and achievement of goals. We believe this helps to create a personal bond and gives tutors the ability to play a fundamental role in the development of our students inside and outside the classroom. Students evaluate their tutors monthly.

 

The success of our tutor-based model requires well-prepared professionals who must not only have an academic background, but also industry experience. We invest a significant amount of time and resources to train our tutors constantly:

 

·Initial training: Averaging 20 hours, to discuss (i) our digital education academic platform and pedagogical trends and (ii) our story, mission and values.

 

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·Continuous training: Averaging approximately 40 hours per tutor per year, in-person at the beginning of each semester and online throughout the rest of the semester, with the objective of developing new competences and preparing the tutor for the upcoming module.

 

·Specialized training: Focused on subjects with a historical student failure rate above the Brazilian national average for all subjects we offer. The tutor is taught methodologies, tips and ways of approaching the content that we believe help improve the student experience.

 

Finally, tutors are our employees and we control the entire hiring and training process and monitor their performance. This helps us ensure that adequate quality levels are maintained.

 

We believe that this careful process allows us to provide a quality service to our students at our hubs, supported by our online, technology-enabled platform and printed content. This model allows for higher student satisfaction and higher retention rates.

 

Technology-Enabled Platform

 

Our hybrid, technology-enabled platform empowers the entire ecosystem:

 

 

We have developed an integrated suite of technology platforms which provides data intelligence for all stakeholders involved in the education process. This enables us to differentiate our hybrid digital education model in the market, manage all of our hubs, conduct all of our commercial activities and operate efficiently across Brazil. Through our in-house platform, Gioconda, and our mobile application, Leo, we offer the following features that benefit students, tutors, hub partners and our management:

 

·Students’ Portal, which is an online portal that gathers all academic content, as well as student information, such as grades, deadlines, attendance and financial situation. It also allows students to access online after-class support from tutors. In December, 2020, to improve the academic experience of our students, we launched a brand-new version of Gioconda, our digital platform, which now includes adaptive learning concepts.

 

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·App Leo, which is a mobile application where students can find all course subjects; simulators and 3D laboratories; all student services, including a WhatsApp center; online support with tutors; course learning results, tracks and learning activities; student and class benchmarks; as well as academic and finance metrics.

 

 

·Tutor’s Portal, which is an online tool, available to all of our tutors that tracks general performance indicators relating to the classes to which they are assigned. This allows tutors to keep track of their students’ development by understanding their individual characteristics and following their engagement, as well as to monitor their classes’ progress. It also gives them access to data that they can use to improve their planning methods and teach their classes effectively.

 

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·Teacher’s Portal, which allows teachers in charge of content production to monitor the delivery of the academic subjects and quickly change, update and add new content to support all students or students from a certain region who have specific difficulties. We also develop our own academic content internally, which allows us to continuously improve it according to students’ feedback and achieve superior satisfaction levels.

 

·Manager’s Portal, which supports all our hub partners and our management team by providing financial and operational performance indicators relating to our hubs, on an individual or consolidated basis, and information about the competitive landscape. It allows partners to monitor the hub’s progress and plan their decision-making based on performance and data. Our partners can also use this platform to create their own advertising campaign with a standardized visual identity and centralized support.

 

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·Sales Management System, which is a platform that allows us and our hub partners to execute a dynamic pricing strategy adapted to each of the geographic markets in which we operate with enhanced discount and promotions controls. We believe that this tool helps us maximize our revenues in each hub and in each market by giving us and our partners across Brazil access to a complete sales interface. This system also provides georeferenced technology through a “heat map” that helps us choose the right place to open a new hub based on an analysis of data on potential students.

 

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Quick and Seamless Adaptation to COVID-19

 

The outbreak of COVID-19 in Brazil posed a series of challenges to companies across different economic sectors, including as a result of social distancing measures imposed by governmental authorities. While restrictions have been imposed on in-person meetings which have affected our business, our operations have not been materially affected since the beginning of the outbreak.

 

We have migrated from weekly in-person meetings with students to weekly virtual meetings conducted through the Microsoft Teams platform. We have also expanded the use of social media tools to interact with our students and prospective students. Our face-to-face or virtual meetings are based on highly interactive activities that can be provided anywhere, anytime.

 

In this context, we have accelerated the delivery of digital content, including by rapidly developing a new version of the Leo application, which now supports and concentrates all features relevant to our students’ learning experience in a single, intuitive tool. We have also provided additional training sessions to our tutors using Microsoft Teams and have been supporting them with methodologies to keep the student engaged.

 

Since we already delivered most of our services remotely, we did not experience a significant disruption to our business from the adaptation of our learning model.

 

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In addition, we believe that what is most important is to have tutors who follow the student throughout the whole course, regardless of whether meetings between tutor and student are held in-person or virtually. Due to the ongoing COVID-19 pandemic, we continue to conduct meetings between tutors and students virtually, with the same class and tutor with which students had in-person meetings before the pandemic, and despite the COVID-19 pandemic, course schedules and curricula remain unchanged.

 

Strong Network of Hub Partners

 

Throughout the years, we have built and kept strong relationships with our 188 hub partners who have played a key role in our expansion. We expect to maintain the relationships as we grow because it is essential given our business’s scalability. Our hub strategy is proximity at scale. We believe that a solid partnership network is critical to execute our digital education strategy and expand our operations in an asset-light manner.

 

Our business model is financially aligned with that of our hub partners. Our hub partners are remunerated by their respective share represented by a given percentage over the tuition fee collected by us from students. The total amount to be transferred to the hub partners on a monthly basis is derived from the pricing terms agreed upon with each student on the service contract. This percentage is similar across all our partnership agreements and varies in accordance with the type of course the student is enrolled in, which are higher for continuing education courses and lower for undergraduate courses. In addition, this percentage is higher in the beginning of the hubs’ operations and decreases throughout their life cycle, thus reducing their payback period and increasing the attractiveness of their investment. We believe that the share of the tuition fee paid to our hub partners represents an amount that allows our hub partners to maintain educational facilities and provide needed services for our students. We also believe that this structure incentivizes our hub partners to attract a higher number of students, which will in turn increase such hub partner’s profitability.

 

Each hub partner is responsible for rental costs and property maintenance, as well as administrative services, cleaning, local student service and infrastructure of the classrooms. Our partners are also responsible for local advertising campaigns and contact with the local community, as well as to provide us with intelligence about the local competitive landscape, context and demographics. This allows us to set individual prices for each course, in each hub, in each city we operate.

 

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. We or the hub partners may terminate the relevant agreement with or without cause. Termination without cause by us or the hub partners requires the party initiating the termination to provide a ninety-day prior written notice. However, we may require, at our exclusive discretion, that the hub partner render services to our students until the end of the relevant semester.

 

In addition to termination without cause, any of the parties to such agreements may terminate them in case of (i) default on a contractual obligation and/or failure to comply with relevant regulations of the MEC or other governmental authorities; (ii) bankruptcy or judicial or extrajudicial liquidation, or termination of our activities or the activities of the hub partners; (iii) underperformance of the hub, evidenced by a reduced number of students enrolled in the courses offered by that hub, or (iv) any impediment to the hub’s operations resulting from the actions of a competent authority. The agreements may provide for the parties to indemnify each other in such cases.

 

Our hub partners may not transfer or assign the agreements or any obligations thereunder. In addition, the agreements provide that we must receive thirty days’ prior written notice of any change of control of our hub partners, and that we may terminate the agreement at our exclusive discretion in such circumstances.

 

We believe that our partners choose to work with us for the following reasons, among others: (1) our highly profitable partnership model; (2) our strong brand; (3) our effective tutor-centered methodology with higher retention rates; (3) our distinctive digital marketing strategy; (4) our technology-enabled platform and sales tools designed to help partners manage their businesses more efficiently on a daily basis, and (5) our comprehensive product portfolio.

 

Partners are typically not business managers; they are entrepreneurs or pedagogical consultants with extensive backgrounds in the education sector – e.g., former school principals or former executives of our Company. The features of our technology-enabled platform help them to follow their operational and financial key performance indicators, or KPIs, in real time. These KPIs include active students per hub, internal evaluation (CPA) application,

 

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drop-out rates, and students’ failure and attendance rates, on both an individual and a consolidated basis if they own more than one hub. In addition, our partners can track the competitive environment, such as pricing promotions and discounts offered by other companies.

 

We further provide specialized training programs for our hub partners so they can become specialists in the day-to-day operations and ultimately be able to deal with financial and academic difficulties. Based on a manager’s portal that provides standard performance indicators, we also host monthly meetings to discuss financial and pedagogical performance. These meetings are an opportunity to discuss the implementation of KPI monitoring routines, train hub partners on presentation skills, provide guidance on turnaround strategies when hubs are performing below their stipulated goals, and monitor the evolution of such strategies.

 

These online meetings bring together hub partners from across Brazil and provide an opportunity to share best practices and experiences, and help us to implement the same tracking system across hub partners. We believe this is a win-win-win approach because, as a result, hub partners improve their results and become more satisfied and loyal as they feel closer to our operations, students enjoy a better user experience and academic performance, and we improve our financial and academic results.

 

These initiatives are part of our Management Excellence Program, or MEP. The MEP was created to standardize various processes in our hubs through an evaluation and recognition methodology which encourages the hubs to invest in their development and growth. Its purpose is to ensure a level of governance appropriate to our size and strategic objectives. The MEP is focused on the program’s five pillars: academic, service, commercial, people, and management and infrastructure. The evaluations measure the performance of each pillar through a self-evaluation and a corporate evaluation.

 

We keep strong and close relationships with our partners. We have a commercial support team for partners that is in continuous contact with them, for quick troubleshooting and standardized communication and training. This effort is supported by a “CRM for partners” platform in order to maximize our partners’ financial results. We are now working on dividing our partners into clusters according to their size and/or stage of the maturity of their hub. This will allow us to offer a more tailored and efficient service, and to support and communicate better with our growing network. In addition, we host annual regional meetings with all of our partners to celebrate the achievements of the previous year, set new goals and align our plans to pursue targets for the next year.

 

We have developed an efficient playbook that enables seamless onboarding and financially aligned operations between us and our partners, as well as organized hub expansion with defined responsibilities for each party, which reinforces the asset-light nature of our business. We are developing an “internal certification” for partners with two categories: basic training (for new partners) and advanced training (for those who are experienced). We are also developing sales simulators to standardize the commercial approach of our and our partners’ marketing teams.

 

In our view, the increase in the number of average hubs owned by each of our partners demonstrates the strength of our relationships. On average, after four years, our partners operate six hubs. Our hub partners’ attrition rate is very low, and most terminations or suspensions of partnerships are attributable to us (usually as a result of our partners’ failure to manage the business).

 

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The number of hubs per base partner (i.e., hub partners with whom we entered into contracts prior to 2017) averaged 1.7 hubs per partner. As of December 31, 2020, this average increased to 5.7 hubs per partner. Moreover, the number of hubs per 2017 partner (i.e., hub partners with whom we entered into contracts in 2017) increased from 3.7 hubs per 2017 partner as of December 31, 2017 to 4.8 hubs per 2017 partner as of December 31, 2020. Similarly the number of hubs per 2018 partner (i.e., hub partners with whom we entered into contracts in 2018) increased from 2.8 hubs per 2018 partner as of December 31, 2018 to 3.5 hubs per 2018 partner as of December 31, 2020. Likewise the number of hubs per 2019 partner (i.e., hub partners with whom we entered into contracts in 2019) increased from 1.7 hubs per 2019 partner as of December 31, 2019 to 2.7 hubs per 2019 partner as of December 31, 2020. The current numbers of hubs per 2020 partner is 1.5. We believe this demonstrates the strength of our relationships with our partners.

 

As shown above, the number of hubs per new partner in year decreased from 3.7 in 2017 to 2.8 in 2018, to 1.7 in 2019 and to 1.5 in 2020. This is due to the fact that the expansion of new hubs in 2017 started in more densely populated areas and then progressed into less densely populated regions, and the number of hubs per new partner therefore decreased as a result of the geographic position of the new hubs.

 

Data-Driven Student Experience

 

Our students’ experience is evaluated based on a continual improvement process. Our students assess all of their contact points with us on a periodic basis (eight times per year). We call this internal evaluation process “CPA”. It is designed to support our and our partners’ decision-making based on the data collected. We ask students to assess their experience with us based on three aspects:

 

·Infrastructure:  The quality of infrastructure of our hubs, such as classrooms, common spaces, practice laboratories, computer laboratories, library and virtual learning environment.

 

·Course:  The quality of the course, subjects and content. The questions are about: the teaching organization; teaching materials such as textbooks, video classes, learning objectives and interactive learning tools; academic and professional training, course coordinator’s performance and tutor performance, both online and during the weekly in-person encounters.

 

·Institution:  The perception of the quality of the academic service, institution management and the institution’s values.

 

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We have an extensive database from the abovementioned pool of information that guides our analysis and shapes our plans to constantly improve the student experience. Below are three of the most frequently followed KPIs:

 

·Tutor:  This assessment takes place on a monthly basis and is available for monitoring by the coordinator and the tutor.

 

·Student Service:  This is a tool used to evaluate our efficiency in addressing administrative issues. This assessment takes place semiannually and is available for monitoring by our hub partners. Our team keeps in contact with the administrative staff of our hubs, host training sessions, and share the best practices to improve service delivery.

 

·Infrastructure:  This assessment takes place semiannually, and we share this KPI with our hub partners in order to support them.

 

Integrated Marketing Model

 

We developed a marketing model for our operations, which focuses on managing the student’s entire life cycle from the moment they are first identified as prospective students, and which integrates communication, commercial and sales strategies as well as management tools. This model allows all teams involved in our marketing process to have a 360-degree view of the student’s growth.

 

We understand that our student’s life cycle is similar to other industries. From finding potential customers to enrolling them as new students, we establish and develop relationships with students. We endeavor to avoid dropouts and maintain ongoing relationships with our alumni. We believe that the strategy to manage this complex process is one of our competitive advantages, which combines high retention (especially after year one) and an asset light operation with low customer cost driven by business intelligence and targeted marketing.

 

However, we are still looking for opportunities to enhance this ratio, including: increasing retention rates by using artificial intelligence, improving penetration of continuing education, efficiencies through marketing mix modelling (also known as M3), and economies of scale in marketing expenses.

 

The marketing process has three cornerstones:

 

·Communication Strategy: We developed our strategy by focusing on managing investments and sales volumes in each region of Brazil, assessing our performance and CAC hub by hub;

 

·Integration and management of sales efforts: We developed an integrated operation process with our hub partners using successful internal teams from each hub, focused on supporting commercial teams across the network; and

 

·Relationship: Our strategies are based on sharing relevant information for the use of our services, engaging students with the course and retaining students.

 

Communication Strategy

 

We developed our strategy focusing on managing investments and sales volumes in each region of Brazil, assessing our performance and CAC hub by hub, and adjusting our execution whenever needed. Media investments are made transparently with hub partners, according to the local market share of our brand and the number of competitors by location.

 

Our marketing strategy is divided into national and local campaigns, with digital and offline marketing as the main pillars of our communication.

 

We plan our national campaigns according to our goals in each micro-region previously identified by our managers. The main media channels we use in an integrated way are digital marketing – consisting of a fully functional digital platform with Google, YouTube, Facebook and Instagram services – in parallel with radio, TV, billboards and print media. Locally, hubs run additional campaigns, increasing the reach and frequency of marketing communication.

 

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In local marketing campaigns, the strategy (designed by the type of media based on national audience tools) is shared with our hubs, who contribute by choosing the best resources to be employed locally. This interaction is crucial to supplement audience data provided by specialized suppliers, which is largely available to the market, since it makes our co-creation process much more robust and integrated.

 

We use research resources such as Kantar Millward Brown, an opinion polling platform, to define the contents of our annual brand campaigns.

 

We purchase audience studies from IBOPE Monitor (the main advertising audience platform in Brazil) to help us select the media vehicles we use and, in the case of radio – which is of great importance due to its popularity and reach of the entire population – we use an artificial intelligence software that monitors and ensures broadcasts of all the agreed advertising content.

 

To promote correct brand usage by our hubs, we use a customization tool for print and online advertising materials, which is fully automated and supervised by our internal marketing team. In addition to the standardized parts distribution system, an internal communication team (composed of designers, digital strategists and content creators) supports our hub network.

 

Integration and Management of Sales Efforts

 

We developed an integrated operation process with our hub partners using successful internal teams from each hub, focused on supporting commercial teams across the network. We operate as a single team, with an eye on the entire business process within our systems.

 

The teams work based on our commercial portal and our customer relationship management system, or CRM, Campus Nexus. The commercial portal is a robust and exclusive tool fully developed by our team. The CRM Campus Nexus is one of the most robust technological solutions for the postsecondary education market in Brazil, being completely customized to suit our needs.

 

We define the goals of each local market and each hub within that market based on studies from our commercial planning team. We calculate our goals for each hub using Microsoft Power BI and consider a set of variables that includes (i) our potential estimate for each market, (ii) the media investments made in the marketplace, (iii) the established competitors, (iv) the market volume already activated and (v) our history of operations in the analyzed and comparable marketplaces.

 

Starting with the definition of goals, every detail in the commercial process is monitored and results are measured on an hourly basis, including conversion rates (i.e. the rates at which we convert potential candidates into enrolled students). All the information exchanged between the commercial teams and our prospective students is registered in a single timeline in our CRM system before being uploaded to their history when they become students. Our sales funnel (i.e. the journey that our potential candidates go through with us) is closely monitored. This allows both the hub and the corporate team to view the contacts and offers made for each candidate, thereby standardizing our communications at all points of contact.

 

A series of indicators allows hubs and teams of managers to continuously adjust their strategies. In addition to their daily goal, hubs have access to hourly uptake trends, information about age, location, use of offers, comparisons with the previous year, and other variables that would affect sales behavior.

 

The commercial portal also allows hubs to use strategic tools that increase their local competitiveness, such as:

 

·Heat-Map:  The platform links the addresses of prospective students to Google’s geo-referencing tool, building a demand map and student base for each region of each city in Brazil. Based on this information, our teams are able to select regions in which to step up marketing efforts, open new hubs and compare such strategies to the location of our competitors.

 

·Pricing:  We have prices and offers that vary according to each local competitive environment and our strategic objectives: whether we are new entrants, late entrants, pioneers, and whether we want to gain market share, defend a position or maintain our growth rate. All hubs feed the platform with the prices and offers of our competitors in each of the cities in Brazil. This is a recurring process, which we believe allows for a correct and agile reading of the competitive dynamics in each location. Based on this information, we

 

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are able to refine our local strategy in order to maximize our profitability without losing competitiveness. Our geographic pricing strategy is then refined with local variables that are constantly changing. The enrollment management system limits the granting of discounts, and we monitor the average ticket to visualize the circulation of funding and revenue in each marketplace.

 

·Average Ticket Evolution:  All hubs in Brazil are able to follow the student intake average ticket (both in the current month and projections for the end of the semester). This ensures a more assertive management of commercial strategies in each hub.

 

·Students’ tickets are adjusted on an annual basis, in line with inflation, throughout their academic journey. In addition, our tickets are also gradually increased by approximately 5% with the inclusion of new “cross-disciplinary” subjects (in line with MEC guidelines) in three periods of the course. For example, if in the first semester the monthly ticket is R$250, normally in the eighth semester it will reach R$334, assuming an annual inflation rate of 3% and an annual ticket increase of 2% above inflation. This process helps to increase the ticket higher throughout the course’s duration. In the first semester of 2020, our average ticket was approximately R$280.

 

 

 

Semester

Monthly Tuition 

  1st semester R$250
Average ticket freshman 2nd semester R$250
Annual adjustments (Inflation(1) + 2%) 3rd semester R$263
New subjects (5% increase) 4th semester R$276
  5th semester R$303
Annual adjustments (Inflation(1) + 2%) + New subjects (5% increase) 6th semester R$303
  7th semester R$334
Annual adjustments (Inflation(1) + 2%) + New subjects (5% increase) 8th semester R$334

 

 

(1)Considering an annual inflation rate of 3%

 

·MEC Census Analysis:  The portal presents a structured analysis of the official data from the MEC’s Census, allowing our partners to understand the main competitors in each city, and thereby direct their sales efforts, offers and local competitive strategies.

 

·Commercial Action Plan:  Each hub is able to register the actions planned alongside our corporate team in our commercial portal. A workflow and action schedule is then designed, monitored and assessed within the platform in order to address the market adequately. We therefore have a uniform execution strategy and an appropriate approach to the main stakeholders and events that need to happen in each region.

 

Our sales team is constantly updated on new strategies through our digital education system. Our sales academy, which uses standard content to educate the entire sales force, broadcast tools for periodic meetings with the entire hub network and mobile groups in order to streamline urgent demands.

 

Our commercial teams work in a fully integrated manner with a set of supporting processes and systems to generate an intense sales effort.

 

Relationship with Students

 

Our student relationship strategies have three main pillars: (i) sharing relevant information for the use of our services; (ii) engaging students with the course and (iii) retention. To support relationship planning, we evaluate all classes taking place in Brazil. In each subject, students evaluate all main factors affecting our courses: the tutor, the content and the infrastructure of the hub. This continuous process, known as CPA, allows a constant flow of information to our management team, who are focused on maximizing the experience delivered to students.

 

Information sharing: We map our student’s entire journey and determine the contact points to increase prospective and existing students’ awareness of our products and services. The entire process is configured in the CRM, which collects information automatically and organizes all data in a single timeline for each student, directing communication for all points of contact. In addition to our communications with the student, we have a tutor in each classroom who plays a fundamental role in shaping our brand, acting, primarily, in the engagement of students in the course.

 

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·Student Engagement: The learning process is maximized with our hybrid model. In all subjects, the student has a tutor who mediates weekly meetings at our hubs, with the sole objective of ensuring the best results for each student. This close and direct interaction is supported by all online services, generating the lowest dropout rates in the digital education business in Brazil. In the partner’s portal, the CPA results of each classroom in Brazil are analyzed and serve as a basis for our management team to build action plans with the objective of making constant improvements. This process has led to significant improvements in student experience as shown by our evaluations.

 

·Retention: The entire retention process is structured and supported by our hubs and is also registered in our systems. Students may not cancel their enrollment without going through an interview, made by the hub coordinator and/or tutor, during which a first retention effort is made. The content of the interview is recorded in our learning management system and the main reasons for a potential dropout are considered for later decision-making. This process receives special monitoring from our operations management team. Our dropouts are concentrated in the first semesters of our courses and, in the past four years (i.e., from 2017 to 2020), we have grown our enrollment volume by more than 400.0% while maintaining the ratio of dropout students per semester. According to the 2018 postsecondary education census by the MEC, our dropout rate for new enrollments was 36.7% whereas the market average was 58.7%.

 

·Redesign of the Student’s Journey: The academic journey of the student, from enrollment to post-graduation, was redesigned with the help of Flwow! - Customer Experience Solutions, one of the best institutions focused on customer experience in Brazil. Through our collaboration with a team of specialists, we are incorporating the best practices in the market for managing student satisfaction. Several changes in processes and indicators are being implemented to maximize our results of operations and the success of our students.

 

Based on our already positive relationship with students, demonstrated by high levels of satisfaction and low dropout rates, we incorporated additional strategies in an attempt to further improve our results of operations, among which we highlight the use of Artificial Intelligence, or AI, and the adoption of best practices for customer experience.

 

In partnership with one of the largest software companies in Brazil, we connected artificial intelligence software to our database in order to establish a profile of our graduating students. Starting with data enrichment and analysis, together with the use of machine-learning algorithms, we are refining the profile of students who have completed our courses and comparing the variables that explain their profile in relation to other students. With this strategy, we refine our commercial policies to attract students with high likelihood of graduation. Studies such as these will reveal what variables would most affect student experience and satisfaction, so our teams of managers could better allocate their focuses. Deliverables in connection with this project include variables such as a student’s ability to pay, relevance of CPA correlations, among others. We expect that, with these initiatives, we could increase our graduation rate and in turn improve our results of operations.

 

Improvements in our quality indicators are the best confirmation of the success of our student relationship policies and strategies, as well as our efforts to integrate of their experience with our brand. The improvements in our CPA and Institutional Concept evaluated by the MEC indicate that we are on the right path.

 

Regulatory Quality Indicators

 

Our model is recognized by certain regulatory quality indicators, such as:

 

·Institutional Concept, or CI: A quality indicator for postsecondary education institutions measured and published by the MEC through on-campus evaluations that comprise educational organization subjects, such as institutional planning and development, academic and management. As of October 2020, our CI score was 5 out of 5 possible points.

 

·General Courses Index, or IGC: This is the most important indicator for a course. The IGC considers the average of the last three CPC grades, the distribution of students across undergraduate and graduate, and the average evaluation of graduate programs. As of September 2019 (the last available data), our IGC score was 13% higher than the market average for private institutions).

 

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·Difference Between Observed and Expected Performance Index, or IDD: A quality indicator that is intended to capture the institution’s contribution to the student’s development. As of October 2020, our IDD score was 3.3, 27% higher than the market average, which was 2.6.

 

·Preliminary Course Concept, or CPC: A quality indicator for postsecondary education institutions measured and published by ENADE that comprises educational and organization subjects, such as student and faculty performance, infrastructure, didactic-pedagogical resources and other inputs, in order to measure general courses quality. As of October 2020, our CPC score was 9% higher than the market average for digital education private institutions.

 

Our Products and Services

 

We believe that, by incorporating quality, engagement, flexibility, affordability and innovation in our offerings, we provide a hybrid learning experience to our students. Our core business is to provide digital education undergraduate courses, however, we also offer digital education graduate and on-campus undergraduate courses.

 

Digital Education Undergraduate Courses

 

·What differentiates our digital education model is its hybrid methodology, with weekly in-person meetings with on-site tutors. Accordingly, in addition to students being able to study when and where they choose through our VLE, students can ask and have their questions answered in-person by a tutor, as well as perform group work and interact with other students. This creates network opportunities and a sense of belonging. Digital education is the best option for those who do not have time to go to class every day and need flexibility in their schedule, but want to have access to quality postsecondary education.

 

·Our portfolio of courses is composed mainly of pedagogy, business administration, accounting, physical education, vocational education, engineering and health-related courses;

 

·Our courses cover three undergraduate degrees:

 

oBachelor: Courses with wide portfolio of theoretical and practical subjects, with an average duration of four to five years;

 

oLicenciatura: Courses focused on the formation of professionals who intend to act as teachers or professors, with average duration of four years; and

 

oVocational: Courses with practical skills for a specific profession, with average duration of two to three years.

 

·We also offer educational content and support via internet and mobile devices. Our VLE is intuitive and dynamic.

 

·As of December 31, 2020, our digital education undergraduate student base consisted of 256,953 enrolled students, and over 195,000 people have graduated from our courses in this modality over the last 13 years.

 

Digital 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;

 

·There are over 140 digital education graduate courses and approximately 25 online short continuing education courses.

 

·Courses are offered in two different versions, which are (i) hybrid model, and (ii) 100% online.

 

·As of December 31, 2020, there were 44,570 students enrolled in our digital continuing education courses.

 

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Other Businesses

 

We additionally offer on-campus undergraduate courses, including those that are currently not allowed to be offered through digital education, such as law and health-related courses, and others such as business administration, accounting, physical education, and engineering. As of December 31, 2020, there were almost 8,000 students enrolled in our on-campus undergraduate courses.

 

In December 2020, we launched a pilot project focused on certificate programs for technical courses, which we believe is a potentially growing sector. This project is part of our strategy to expand complementary offerings throughout the students’ lifelong journey, providing an opportunity for students to follow a certificate program for technical courses in parallel with high school studies or prior to their enrollment in an undergraduate program. As part of the first phase of the pilot project, there are three technical courses already authorized and being offered at ten hubs located in certain Brazilian states. We believe this could represent an additional source of revenue for us and contribute to a reduction of our customer acquisition cost, as these students may extend their learning journey with the pursuit of an undergraduate degree afterwards.

 

Distribution and Geographic Presence

 

As a consequence of the new regulatory framework in 2017, which eased the process to open new hubs, we were able to expand our operations and geographic presence. As of December 31, 2020, our network consisted of 709 hubs, compared to 545 hubs as of December 31, 2019 representing an annual growth rate of 30.1%. As of December 31, 2018, our network consisted of 370 hubs, compared to, respectively, 221 hubs and 72 hubs as of December 31, 2017 and December 31, 2016, representing a CAGR of 77.1%. As a result of our differentiated value proposition, we were able to increase our number of hubs and student base while improving quality.

 

As of December 31, 2020, our network consisted of 601 partner hubs and 108 proprietary hubs. We are present in all states of Brazil with considerable market share of enrollments in all regions. We have operating hubs in 620 cities and in 56.2% of all cities with over 40,000 inhabitants – which, according to our business model, is the optimal population to accommodate a digital education hub. We are also present in 16 of the 17 cities in Brazil with over a million inhabitants. We note that as soon as we enter a new city, we usually quickly gain market share and become the market leaders of the city through our combination of hybrid offering, efficient pricing strategy and student-centric business model.

 

We have worked together with an international consulting firm to develop a robust expansion plan, which has mapped several opportunities to pursue in the next five years. Additionally, we also employ a heat map tool (which we developed in-house) that allows us to efficiently position new hubs geographically. Our heat map searches and analyses the locations of potential students’ homes and workplaces and optimizes our decisions as to the location of our hubs, whether to open new hubs or to relocate already operational hubs.

 

We have a very strong presence in the south region of Brazil, with around 183 hubs and a 26.7% market share in terms of student enrollments. We are also present in locations where access to on-campus education is difficult or deficient, with a large amount of hubs in small cities. We believe that our strong distribution network serves our purpose of democratizing access to postsecondary education and cementing our leadership nationwide.

 

We currently have a strategy to further penetrate the southeast region, as it is the largest market in Brazil. The charts below illustrate our market share and the representativeness of each region in terms of total market, as well as the breakdown of hubs per region:

 

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Since Uniasselvi’s foundation, our headquarters have been located in Indaial, in the State of Santa Catarina. However, we decided to expand the executive management and strategic departments, such as Commercial, Sales and Financial, to Florianópolis, in order to be closer to one of the main technology hubs in the Brazil.

 

Our Students

 

As of December 31, 2020, we are focused in our 309,560 undergraduate and graduate students, of whom over 83.0% are enrolled in our digital education undergraduate courses. From this audience, 86.0% are under 40 years old, 85.0% came from public secondary school (K-12), 87.0% work while studying with us, 83.0% pay their own tuition, 77.0% have a monthly household income of up to U.S.$2,000 per household and 67.0% are women.

 

The composition of our current intake is as follows: 36% enrolled in vocational courses, 19% in pedagogy and related courses, 16% in healthcare courses, 11% in business administration and related courses, 7% in physical education courses, 5% in engineering courses and 6% in other bachelor courses.

 

Our students consistently value their experience with us and we have excellent results in terms of satisfaction and recommendation of our brand.

 

Our Culture and DNA

 

Our operations and corporate culture are guided by the following values:

 

·Ethics and Respect: To always abide by the rules, with transparency and respect, is one of the key basis of our relationships with students, employees and partner hubs.

 

·Appreciation of Knowledge: It is not enough to just know something, it is necessary to know how to do it. We value knowledge as a way of inspiring people and bringing them closer together.

 

·Vocation to Teach: Our professionals take pleasure in educating and contributing to our students’ growth.

 

·Ownership Attitude: We think and act as owners of the business.

 

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·Simplicity and Collaboration: We work together as a team, with an open and direct dialogue.

 

·Focus on Results and Meritocracy: Our team grows by merit through the overcoming of goals and dedication of each individual.

 

We believe that every step we take and every milestone we achieve brings us closer to our mission of democratizing access to high-quality, accessible, flexible and affordable postsecondary education in Brazil. Our 6,174 employees as of December 31, 2020, 63.8% of which are women, share the same goal and common values. Over 92.5% of our employee base has a postsecondary education degree and 62.1% hold a postgraduate qualification, master’s degree or doctorate.

 

Leading us is a management team with over 100 years of aggregate experience in renowned education companies, as well as diverse backgrounds across banking, financial management and technology.

 

Our internal corporate environment survey shows positive results regarding satisfaction of our employees and how they feel about working with us:

 

·94% of our employees are proud to tell other people that they work with us.

 

·92% of our employees believe that their job has a special meaning; it isn’t “just another job.”

 

·92% of our employees feel good about the way they contribute towards a better society.

 

We closely monitor our employees’ satisfaction rate, which was above 81 on a scale of 0 to 100 in 2020, 2019, 2018 and 2017, as measured by Great Place to Work. We were also awarded the Great Place to Work certificate as one of the top 10 companies to work for in the state of Santa Catarina in 2020 for the second consecutive year (out of a study of over 130 companies with over 1,000 employees each).

 

We are active in our community and continuously seek to develop and participate in social and environmental initiatives. Our corporate responsibility extension policy has already reached over 110,000 people and comprises several initiatives centered on our community, including environmental, cultural, sporting and artistic aspects, among others. In 2019, we were recognized as a Socially Responsible Organization by ABMES.

 

We have also created projects tackling social and environmental issues, such as: Project Green Classroom, endorsed by the Brazilian Ministry of the Environment, which democratizes access to information while promoting awareness, reflection and construction of social and environmental action; and Autismos, an educational support group that has the objective of informing professionals from the education sector about Autism Spectrum Disorder (ASD) and raising awareness, in which 15,050 people across 110 hubs have participated, with over 360 volunteer tutors.

 

During the COVID-19 pandemic, we provided free online courses for students on various subjects through our engaging “Trilha de Aprendizagem” program. Since the beginning of the social distancing measures and shelter in place orders in Brazil, over 190,000 people have completed these digital courses, totaling more than 450 thousand sessions. More recently, in July 2020, we have also structured a free online training program, “Como Ensinar à Distância,” in order to assist public school teachers with teaching using digital methods, including exclusive live sessions with specialists. We had over 50,000 subscriptions from participants from more than 2,000 municipalities across Brazil just in the first week of the program, which we believe has contributed to solidifying our reputation among teachers, tutors and professors as a leading digital player in education.

 

Our Competitive Strengths

 

Over the last 20 years, we have built a set of capabilities and attributes in our hybrid digital education business model and we believe this provides us with meaningful sustainable competitive advantages:

 

Digital Education Approach to Postsecondary Education

 

Our value proposition differentiates us from other players in the Brazilian market, as we address what students value the most by providing a personalized student experience which combines the advantages of digital education and on-campus education.

 

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We believe our platform is difficult to replicate and it would take a significant amount of time and investments for competitors to be able to compete with our know-how, brand awareness, content production and methodology, infrastructure, as well as build a solid partner network to reach the scale of our operations.

 

We have been developing and improving our digital education platform not only to support our students in their academic journey, but also increasingly to support them in their professional endeavors. We are passionate about democratizing access to postsecondary education in Brazil because we know the power of affordable education and its ability to transform our students’ lives.

 

Through our technology-enabled platform, we support all of our stakeholders. While we produce and deliver content that is centralized and constantly evolving, we enable hub partners and tutors to distribute it in multiple formats that cater to students’ needs and prioritize a personalized, engaging, effective and simple experience. We also enable our partners to actively manage hubs’ activities in a comprehensive manner, providing a 360-degree vision of their operations, through a data-driven online portal. This technological platform gathers data regarding their student base, student performance, financial indicators, tutor and infrastructure evaluations, commercial performance, pricing and others – highlighting key insights, such as students in need of special attention, and helping predict and avoid potential dropouts.

 

The combination of these aspects enables us to enroll a large student base and attract loyal partners and trained tutors, ultimately increasing our ability to expand geographically at an even faster rate, while maintaining our differentiated customer support.

 

Asset-Light and Scalable Business Model

 

We have an asset-light, highly scalable business model that emphasizes operational efficiency and profitability. We are able to do so by taking charge of hiring and training tutors, developing content, and managing students’ experience as well as incurring faculty and marketing costs, while leaving partner hubs’ day-to-day operations, and expenses (general and administrative, rental, equipment) to the care of our partners, who 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 allows us to quickly expand our operation and geographic footprint with a modest effort.

 

Leading Student Experience, Brand Awareness and Strong Academic Standards

 

Our disruptive, student-centric model has achieved the highest satisfaction levels in terms of quality, employability, affordability, infrastructure, recommendation and location consistently across all regions where we are present.

 

We believe brand awareness is also a key metric to students’ decision-making process. According to statistics from Google, we were the educational brand with the highest growth in Google searches in Brazil in the six months ended June 30, 2020, with 27% growth when compared to the same period in 2019, as compared to a market average of 8%. Furthermore, according to Educa Insights, as of December 31, 2019, we had the highest levels of intention to enroll, first choice and top-of-mind brand, reaching on average 61.1%, 26.5% and 24.3%, respectively. This compares to 39.8%, 13.2% and 12.6%, respectively, for the second place brand. This data relates solely to digital education.

 

The results from the study conducted by Educa Insights also establish five strategic drivers (employability, quality, tradition, accessibility, and product and infrastructure), that integrate our brand equity and its nationwide presence. Below are certain highlights from the study:

 

Nationwide perception of quality. We are positioned as one of the best options for digital education in every region of Brazil, with results for the “product,” “employability” and “quality” dimensions significantly above average when compared to our competitors.

 

Superior quality maintained in the new waves of hubs. Our perceived quality has no relation whatsoever with the maturity level of our hubs, which we believe highlights the scalability of our model.

 

A winning hybrid model. We present superior growth driven by superior intake indicators and brand perception in markets currently dominated by established Brazilian players.

 

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An academic model that impacts enrollment intentions. Our hybrid model has high levels of acceptance in that it is perceived as far better than traditional digital education alternatives.

 

Our best-in-class quality standards. Our academic standards are a testament to the quality of our methodology, infrastructure and stakeholders. As of October 2020, our CI score was a five on a scale of one to five.

 

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 track the cohorts on a semi-annual basis. We have cohorts showing substantial growth from our current hubs, 626 of which opened between the second half of 2017 and the second half of 2020 and are still maturing. New hubs usually concentrate first and second semester students who tend to have higher drop-out rates compared to students in other semesters. In addition, in the initial years after opening a new hub, we have a strategy of accelerated payback for the hub partners, by means of their higher shares over the tuition fee in the initial years, based on regressive percentages defined in each partnership agreement, which is important to sustain our partners’ profitability. We typically achieve a positive Adjusted EBITDA margin after three semesters of operation, considering hub partners’ lower shares over the tuition fee and a higher student base. In addition, our average student base per mature hub is approximately six times higher than the student base of a recently opened hub, which is ramping up.

 

 

Our strong cohorts are driven by the maturation of our hubs, our high retention rates, the expansion of our offerings such as new courses and our cross-selling opportunities. We also closely monitor CAC and lifetime value to our student base, as well as the average payback and internal rate of return for our hubs.

 

Our Growth Strategies

 

We aim to continue generating value for our shareholders by implementing the following strategic initiatives:

 

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Maturation of Our Hubs

 

We expect to grow significantly with the maturation of our hubs. Our hubs normally have a four-year maturation cycle, which begins when a hub becomes operational with a first intake cycle that progresses through these four years. Nevertheless, a hub only reaches full capacity after approximately eight years of existence, in function of the increasing brand awareness locally and continued optimizations in the average size of classes. Given that our hubs have an average life of 3 years, or six semesters and are still ramping up, we see considerable room to grow our operations and student base. As of December 31, 2020, we operated 709 hubs in different maturation stages, of which 11.7% are mature and 88.3% are ramping-up. This illustrates the compelling strength of our business model.

 

We believe we have significant potential to increase our margins through the maturation of our hubs. Because of our strategy to accelerate the payback to our hub partners with higher shares of the tuition fee in the initial years, as hubs mature their share decreases to approximately 21%, thus increasing our profitability and allowing us to reach an average Adjusted EBITDA margin at maturity of approximately 40%.

 

Opening of New Hubs and Expansion to New Markets

 

We have worked with a leading international consulting firm to develop a robust expansion plan which has mapped several opportunities that may be captured in the next five years. Additionally, we also employ a heat map tool, which we developed in-house, that we believe allows us to geographically position new hubs more efficiently. Our heat map searches and analyzes the locations of potential students’ homes and workplaces, thereby optimizing the location of our hubs by determining whether to open new hubs or to relocate already operational hubs.

 

We intend to continue to expand to sizeable Brazilian states which have a significant market opportunity and where we have limited presence in states of the southeastern region of Brazil, such as São Paulo, Rio de Janeiro, Minas Gerais and Paraná. We have adopted a distinct strategy regarding these locations by investing less in media and choosing out hub locations more selectively. As a result, we have had encouraging results in markets where our brand is not well known. We use locations with heavy traffic, such as malls, subway stations and supermarkets, to accelerate our expansion in these markets. We have recently entered into a partnership with one of the largest supermarket chains in Brazil. This has enabled us to install hubs inside their stores which generally enjoy a privileged location with heavy traffic.

 

We believe we have the right attributes to strengthen our presence in the Southeastern Region of Brazil, which represents 38.8% of the total digital education enrollments in private institutions in Brazil in 2019 according to the INEP.

 

Offering of New Undergraduate Courses

 

As of December 31, 2020, we offer 150 digital education undergraduate courses, which is much higher than in 2016 when we only offered 41 courses. We believe there will be a significant increase in digital education enrollments if the MEC authorizes the offering of additional undergraduate courses, such as law and health-related courses like nursing, which, as of now, can only be provided on-campus. Because of our state-of-the-art infrastructure, we believe we are better positioned to capture this market opportunity and further increase our ecosystem relative to our competitors.

 

According to Educa Insights, if the MEC allows law courses to be offered in a digital education format, 20.8% of new enrollments in that subject are expected to migrate to digital education in the short-term. Educa Insights estimates that there could be as many as 104,100 students enrolled in digital education law courses by 2023.

 

Further Extension of Postsecondary Education Journey and Certificate Programs (Cross-Selling)

 

We also seek to offer a broader range of graduate, vocational and continuing education programs. As of December 31, 2019, 22.2% of our undergraduate students enrolled in graduate courses with us once they had completed their undergraduate education. In addition, as of the same, date 50.0% of our undergraduate alumni intended to enroll in a graduate course with us, whereas only 27.0% of these individuals intended to continue their education elsewhere. We believe that the expansion of these programs will enable us to increase our serviceable addressable market, improve our economics and position ourselves as the trusted knowledge partner of our students while continuously diversifying our operations. We believe this means there is potential to expand student’s life time value and cross-sell opportunities at marginal cost.

 

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Although all of our hubs are able to offer our entire portfolio of graduate courses, our partners choose to offer these courses after gaining significant expertise in offering undergraduate courses. Given that 88.3% of our hubs have less than three years of operations, we see a considerable potential for growth in offering our graduate courses.

 

We have also been structuring initiatives to improve our product offering and distribution channels. Toward the end of 2020, we launched the technical courses project. This project is part of our strategy to expand complementary offerings throughout the students’ lifelong journey, providing an opportunity for students to follow a certificate program for technical courses in parallel with high school studies or prior to their enrollment in an undergraduate degree. As part of the first phase of the pilot project, there are three technical courses already authorized and being offered at ten hubs located in the states of Bahia, Ceará, Santa Catarina and Rio Grande do Sul during the first phase of the project. We believe this could represent an additional source of revenue for us and contribute to a reduction of our customer acquisition cost, as these students may extend their learning journey with the pursuit of an undergraduate degree afterwards.

 

Selective Pursuit of M&A Opportunities

 

We intend to selectively pursue acquisitions that we believe resonate with and enhance our value proposition. We are interested in (i) technology companies, such as education technology companies whose solutions can be quickly incorporated into our learning platform, thus improving the learning experience of our students and/or providing useful information for our intake and overall management processes; (ii) life-long complementary digital education courses that enhance our offering in order to expand the relationship cycle with our students, such as preparatory programs for their entrance into the labor market, among others, which we can accommodate in our hub distribution model; and (iii) consolidation opportunities through the acquisition of mid-sized digital education players which have low margins and lack scale, with whom we can leverage our business and academic expertise to improve operational results and margins. We have already begun discussions with a number of selected potential targets in order to move this process forward. We have already identified over 100 education technology companies and are in on-going conversations with ten players. We have also identified a few digital education peers with the required minimum size.

 

Our Market Opportunity

 

We believe Brazil is the largest market in Latin America and is among the most attractive private education market opportunities in the world for the following reasons:

 

·It is one of the largest private education markets in the world. Brazil ranks as the third largest private postsecondary education market in the world, only behind India and China, according to INEP and UNESCO, but still has significant room for growth. We believe there is an addressable digital education market of R$104.7 billion in revenues and with 31.4 million students, which can be accessed by increasing the penetration rate;

 

·Postsecondary education penetration rates have been increasing, but are still well below other countries. According to the OECD, as of 2018, Brazil has one of the lowest postsecondary education penetration rates in the world, with only 18.0% of the Brazilian population between 25 and 64 years having completed any sort of postsecondary education degree. This is much lower than the OECD average of 39.0% and also below other countries in Latin America, such as Argentina and Chile (with 36.0% and 25.0%, respectively);

 

·The Brazilian National Education Plan targets. 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 37.4% in 2019;

 

·Postsecondary Education Degree in Brazil leads to higher employability levels and higher 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

 

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between on-campus and digital education 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;

 

·Digital Education has driven recent private sector growth. According to INEP, digital education expanded at a CAGR of 15.4% between 2008 and 2018, significantly greater than the CAGR of 1.7% for on-campus education in during the same period. In this context, digital education courses are becoming increasingly popular in Brazil due to (1) greater flexibility for students who also work, and (2) greater affordability in that tuitions are approximately one third of on-campus tuition fees; and

 

·Hybrid delivery offering is dictating the pace. Postsecondary education students in Brazil need more affordable and flexible alternatives to study, as well as an academic experience that involves personal contact with faculty and other students. According to the MEC, as of December 31, 2018, 87% of Brazil’s secondary school (K-12) students were enrolled in public schools. In this context, we believe students without strong academic secondary school backgrounds are less likely to continue their education through 100% online courses and are more likely to continue their education in courses that provide a hybrid combination of both on-campus and online offerings.

 

Our Addressable Market

 

According to a study published in February 2020 by Educa Insights, the digital education business for adults in Brazil has a total addressable market of 31.4 million students, equivalent to R$104.7 billion in revenues as of 2019. Out of the total addressable market of students, approximately 11.8 million are undergraduate students in digital education, 8.0 million are postgraduate students in digital education, 5.6 million are students on technical courses and 6.1 million are students potentially enrolled in professional qualification courses. Out of the total addressable market, in revenue terms, approximately R$37.6 billion is concentrated in undergraduate courses, R$31.7 billion in postgraduate courses, R$21.3 billion in technical courses and R$14.1 billion in professional qualification courses.

 

Our Competition

 

We believe there are no pure digital education providers in Brazil with a business model which is perfectly comparable to ours. This is due to the fact that our value proposition combines digital and technology driven and in-person offerings. Several companies compete in postsecondary education industry and the market is very fragmented. As of December 31, 2019, according to INEP, there were 2,306 private postsecondary education institutions in Brazil and 308 offering digital education undergraduate courses. According to the MEC, we were the second largest digital education postsecondary education group in Brazil, as of December 31, 2019 in terms of enrollments.

 

 

Seasonality

 

Our operating results normally fluctuate as a result of seasonal variations in our business. For further information, see “Item 3. Key Information—D. Risk Factors—Certain Risks Relating to Our Business and Industry—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” and “Item 5. Operating and Financial Review and Prospects.”

 

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INDUSTRY OVERVIEW

 

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 over 80% of total students enrolled as of December 31, 2019 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

 

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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 2019, there were 6.5 million students in Brazil.

 

In Brazil, approximately 23 million people have completed secondary education, but have not attended a postsecondary education institution according to a study published in February 2020 by Educa Insights. 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 National Education Plan (Plano Nacional de Educação), or 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 37.4% in 2019. 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 2019, there were 8.6 million students enrolled in private and public postsecondary courses in Brazil (6.5 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 3.5% 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.

 

 

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In the private education market, 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, as of December 31, 2029, stands at 35.1% of the overall private offering, a 24.6 p.p. increase in comparison to 10.5% in 2008. According to INEP, distance learning expanded at a CAGR of 16.0% between 2008 and 2019, significantly greater than the CAGR of 1.0% for on-campus education in the same period.

 

 

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 51% of new students in 2019 following growth at a CAGR of 18.2% in the period and is expected to overtake annual on-campus enrollments, which have been almost flat in the last few years.

 

 

This trend is even more pronounced in postgraduate courses, which exhibited 50% annual growth over the last two years according to Semesp. Postgraduate 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, on-campus 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.

 

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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 postgraduate education.

 

Salary Gap of Students in Brazil
R$

 

 

Source: Educa Insights

 

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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 Digital Education Models Side by Side

 

 

Source: INEP, Educa Insights

 

On-Campus and Digital Education Student Profile

 

There are significant differences between the typical on-campus and digital education 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 digital education student consisting of persons who are over 25. In recent years, there has been a reduction in the average age of digital education 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 digital education 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 digital education the percentage is 77%.

 

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There is no significant difference in the degree of acceptance of digital education 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 digital education students typically completed their secondary education in public schools (only 14% of digital education students have attended private secondary schools), there are no disparities in quality between these two formats.

 

In addition, 69% of digital education students are women, whereas only 57% of on-campus students are women. The different profiles of on-campus and digital education students in Brazil are illustrated in the graph below.

 

On-Campus and Digital Education Student Profiles in Brazil


According to ABMES, based on INEP (2018)

 

 

Source: ABMES, INEP 2018, Educa Insights

 

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Digital Education Acceptance and Employability

 

As a result of students’ perception that the quality of on-campus and digital education courses is similar and given the abovementioned differences between these formats, there has been a major increase in the acceptance of digital education 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 digital education 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.

 

Digital Education 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 digital education 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 digital education undergraduate courses and 89% for those who complete digital education graduate courses).

 

Digital Education

 

Digital Education Overview

 

In Brazil, digital education programs can provide the same graduation degrees as traditional on campus programs. As a condition to offering the same degrees for on campus courses, digital education 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 digital education offerings in Brazil:

 

·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;

 

·Video conference-based: classes which are broadcast to several students via video conference; and

 

·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 digital education courses. In addition, digital education 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 digital education courses.

 

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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 digital education 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 digital education (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, digital education courses have proven to be resilient and well positioned to attract students in need of an affordable alternative. Demand for digital education 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 digital education degrees, the digital education 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 digital education ticket is significantly lower and is at R$266 per month. Affordable digital education 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.

 

We believe that the COVID-19 pandemic has accelerated the digital transformation in the sector by bringing a virtual learning experience to all students. We believe that level of acceptance of digital education is growing continuously as a result of the positive experience that students have had with digital offerings. According to a poll conducted by Educa Insights between April and June 2020, 18% of students who intended to enroll in on-campus

 

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courses have opted for digital education solutions instead as a result of social distancing measures. We believe that this trend could enhance our ability to capture and enroll new students seeking a more structured and customizable hybrid solution.

 

In addition, it is expected that the macroeconomic environment in Brazil will be adversely affected by the pandemic, with a decrease in income levels and rising unemployment rates. We believe that the value proposition inherent in digital education value combined with its more affordable tuition fees should drive new enrollments in the sector, and accelerate the change in student base from on-campus to online or hybrid courses. Given the increasing numbers of enrollments in digital education as a result of the pandemic, Educa Insights estimates that digital education student base could surpass the on-campus student base in 2022.

 

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 digital education 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 digital education units. Digital education units become rarer as cities decrease in 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 digital education 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 Digital Education

 

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

 

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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 134 million users in 2019, 99% 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 digital education 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, digital education 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 digital education 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.

 

Due to the COVID-19 pandemic, students and teachers have been required to adapt classes into a fully digital format as a result of social distancing measures. The high levels of satisfaction support the proposition that technology makes it possible to offer a complete learning experience and support all the necessary interactions between students, teachers and tutors. The population increasingly rely on technology equipment and tools. We expect an increase in households’ digital access in 2020 as a result of the increasing amount of time people are spending at home, including as a result of working from home measures implemented by several corporations.

 

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 digital education.

 

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 Digital Education Offering

 

Worldwide online postsecondary education courses have structural differences when compared to Brazilian online postsecondary education courses. Digital education 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, digital education 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. Digital education 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.

 

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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.

 

Digital Education Market Opportunity

 

According to Educa Insights, there is a R$104.7 billion addressable market consisting of 31.4 million students across undergraduate, post-graduate, professional qualification and technical courses.

 

Digital Education Market Size

 

 

Source: Educa Insights

 

Undergraduate courses account for 1.9 million students and R$6.1 billion of the digital education market and also have significant room for growth as the overall addressable market for undergraduate digital education courses is R$37.6 billion. Digital education 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. As of December 31, 2020, professional qualification and technical courses, which are not offered through digital education 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 sector, 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 digital education. 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 digital education 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. However, as previously explained, the COVID-19 pandemic has accelerated this trend, and Educa Insights now believe that the distance learning student base will surpass the on-campus student base by 2022.

 

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Historically, Brazilian regulations imposed mandatory bureaucratic preapproval procedures to request the opening of new learning units, which limited growth in the distance learning market. 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 digital education 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 digital education 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 digital education 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 digital education, 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.

 

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According to Educa Insights, over 20.0% of prospective law students would prefer to be enrolled in digital education 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 digital education, and new students seeking a law degree.

 

While medicine courses have limitations related to digital education 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 Digital Education Expansion in Brazil

 

We believe the following factors are expected to contribute to the expansion of the digital education market in Brazil:

 

·Hybrid digital education 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 digital education equals that of on-campus learning, it is expected that the growth in digital education will accelerate.

 

·New courses offerings would increase penetration of digital education. The ability to offer law degrees in a digital education 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 digital education 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 digital education 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 digital education 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.

 

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·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 digital education 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 digital education market. Digital education 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 digital education 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 digital education’s unique value proposition and affordability place it in a good position to capture the growth necessary to fulfill the Brazilian government’s objectives.

 

REGULATORY OVERVIEW

 

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.

 

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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 (i.e., June 26, 2014). 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 market.

 

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 sector of the Brazilian education system over which it is responsible. In addition, these objectives act as guidelines for the private education market.

 

Postsecondary Education

 

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.

 

Regulatory Bodies

 

The main regulatory bodies of postsecondary education in the Brazilian education system are:

 

·the MEC;

 

·the INEP;

 

·the CNE;

 

·Higher Education Board (Câmara de Educação Superior), or CES;

 

·the CONAES;

 

·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 responsible for the regulation of primary and secondary school, and the CES, which is the collegiate responsible for the postsecondary education system. The CEB and CES are each composed of 12 members appointed by the President of Brazil.

 

Ministry of Education (MEC)

 

The MEC is the highest authority for postsecondary education within the Brazilian national education system, whose competence consists, among other prerogatives, of the following: (1) confirming the CNE’s accreditation decisions for postsecondary education institutions; (2) confirming evaluation systems and criteria adopted by the

 

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INEP; (3) confirming opinions and regulation proposals from the CNE; (4) issuing rules and instructions for compliance with laws, decrees and regulations pertaining to education issues; and (5) regulating and monitoring the postsecondary education system through its secretariats.

 

National Education Council (CNE)

 

The CNE is a consulting and decision-making body monitored by the MEC, collectively comprised of the Chamber of Primary and Secondary Education, or the CEB, and the Chamber of Postsecondary Education, or the CES, each composed of 12 members appointed by the President of Brazil.

 

The CNE is required, among other responsibilities, to: (1) issue regulations to implement the MEC’s guidelines, as well as advise and support the MEC in its activities and decisions; (2) decide on accreditation applications and renewals from postsecondary education institutions engaged in distance learning, based on the opinion of the relevant secretariats; (3) propose guidelines and deliberate on the preparation of the evaluation instruments for accreditation and reaccreditation of institutions to be elaborated by the INEP; (4) issue guidelines to be observed by the SERES for accreditation and reaccreditation of universities, university centers and colleges; (5) determine, through the CES, the inclusion and exclusion of course designation from the catalog of advanced technology courses; (6) decide appeals of decisions issued by the SERES, the CEB or the CES; and (7) analyze and propose questions regarding the application of postsecondary education legislation to the MEC.

 

Anísio Teixeira National Institute for Educational Research (INEP)

 

The INEP is a federal body linked to the MEC whose main responsibilities are, among others, to: (1) design, plan, coordinate and operationalize actions for the evaluation of HEI, undergraduate courses and government schools, as well as the National Exam for the Assessment of Student Performance (Exame Nacional de Desempenho de Estudantes), or the ENADE, the examinations and assessments of undergraduate students; (2) design, plan, coordinate, operationalize and evaluate indicators related to postsecondary education resulting from examinations and inputs from official databases and the establishment and maintenance of databases of specialized evaluators and collaborators, including the appointment of evaluation committees; (3) prepare and submit to the MEC the instruments for external evaluation (in loco), in accordance with the guidelines proposed by the SERES and by other competent bodies; (4) design, plan, evaluate and update the indicators for the external evaluation instruments in place, in accordance with the guidelines proposed by the CONAES; (5) chair the Technical Committee for Evaluation Monitoring; and (6) plan, coordinate, operationalize and evaluate the actions necessary to achieve its objectives.

 

National Higher Education Evaluation Commission (CONAES)

 

The CONAES is a coordination and monitoring body of the National Higher Education Evaluation System (Sistema Nacional de Avaliação da Educação Superior), or SINAES, monitored by the MEC, composed of a President and 13 members, including one representative of the INEP, one representative of the Foundation for the Coordination of Improvement of Postsecondary Education Personnel (Fundação de Coordenação de Aperfeiçoamento de Pessoal de Nível Superior), or CAPES, three representatives of the MEC (one of which must come from the body responsible for the regulation and monitoring of postsecondary education), one representative of the student body of postsecondary education institutions, one representative of the academic staff of postsecondary education institutions, one representative of the administrative body of postsecondary education institutions, and five members appointed by the Minister of Education, with distinguished scientific, philosophic and artistic knowledge and proven expertise in postsecondary evaluation or management.

 

Among other activities, the CONAES is required to: (1) propose and evaluate the dynamics, procedures and mechanisms for institutional evaluation, courses and student performance; (2) establish guidelines for the organization of evaluation committees, analyze reports, prepare opinions and submit recommendations to the competent bodies; (3) formulate proposals for the development of postsecondary education institutions, based on the analysis and recommendations produced in the evaluation processes; (4) communicate with the state educational systems, with the aim to establish common actions and criteria for the evaluation and supervision of postsecondary education; and (5) annually submit for approval by the Minister of Education the list of courses for which students will apply for the ENADE.

 

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Secretaria de Regulação e Supervisão da Educação Superior (SERES)

 

The SERES is a federal body linked to the MEC, which is responsible for the formulation of public policies for regulation and supervision of private and public postsecondary education institutions. The main responsibilities of the SERES are: (1) to authorize, recognize and renew recognition of undergraduate and postgraduate lato sensu course; (2) to prepare opinions to the postsecondary education institutions’ accreditation and reaccreditation proceedings; and (3) to manage the e-MEC, a public registration information system for postsecondary institutions and courses.

 

Secretaria de Educação Profissional e Tecnológica (SETEC)

 

The SETEC is the federal body, linked to the MEC, which is required to: (1) formulate, plan, coordinate, implement, monitor and evaluate the public policies for professional and technological education; and (2) promote the innovation, expansion and improvement of the quality of professional and technological education.

 

Organization of Postsecondary Education Institutions

 

In order to allow postsecondary education institutions to fulfill their objectives, the LDB also provides that postsecondary education includes the following programs:

 

·Undergraduate courses, including traditional and technological undergraduate courses, offering specific training and diplomas to students, open to candidates who have completed secondary school or equivalent and who have been approved in the respective selection or entrance examinations;

 

·Postgraduate courses, including master’s and doctoral degrees, specialization courses, further training courses and others, open to candidates who hold a diploma in an undergraduate course and who meet the requirements laid down by educational institutions; and

 

·Extension courses, understood as any academic, technical or cultural activity that is not included as an integral and compulsory part of the undergraduate and postgraduate curriculum, in which the students receive certificates. Such courses are open to candidates who meet the requirements established in each case by educational institutions.

 

According to the LDB, postsecondary education can be provided by public or private institutions. A private postsecondary education institution must be controlled, managed and supported by an individual or a legal entity with responsibility for financing its supported entities. Postsecondary education institutions may be supported by for-profit or not-for-profit private institutions, or supporting entities, as follows:

 

·Private in the strict sense: private for-profit institutions created and maintained by one or more private individuals or legal entities;

 

·Community: incorporated by groups of individuals or by one or more legal entities and that include representatives of the community in their organizational structure;

 

·Confessional: incorporated by groups of individuals or by one or more legal entities that meet the specific confessional and ideological orientation and that include representatives of the community in their organizational structure; or

 

·Philanthropic, in the form of the law.

 

According to their organization and academic prerogatives, postsecondary education institutions can be:

 

·Colleges: Colleges are public or private educational institutions offering postsecondary courses in one or more areas, maintained by a single supporting entity and with isolated management and direction. Colleges are allowed to offer courses along several levels, namely bachelor’s, associate’s, specialization and graduate programs (master’s and doctorate degrees). Colleges have minimum requirements with regard to qualification of faculty members and their labor practices, and cannot establish new campuses, courses or spots without prior authorization from the MEC;

 

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·University Centers: University centers are public or private education institutions offering several bachelor’s, associate’s and graduate programs, and are expected to provide appropriate conditions with respect to education and qualification opportunities for their professors. To be considered a university center, the institution shall comply with the following requirements: (1) at least one-third of the faculty members must hold a master’s or doctorate degree; (2) at least 20% of the faculty members must work on a full-time basis; (3) at least eight undergraduate courses shall be recognized and have obtained a satisfactory concept in the on-site external evaluation carried out by the INEP; (4) it shall have an institutionalized extension program in the areas of knowledge covered by their undergraduate courses; (5) it shall have a scientific initiation program with a project oriented by doctoral or master’s teachers, which may include programs of professional or technological initiation and initiation to teaching; (6) it shall have obtained CI greater than or equal to four in the on-site external evaluation performed by the INEP; and (7) it shall not have been penalized as a result of an administrative supervision process in the last two years.

 

·Universities: Universities are public or private education institutions offering several postsecondary courses, continuing education and research development. Like University Centers, certain requirements for university reaccreditation must be observed, namely: (1) one-third of the academic staff is hired on a full-time basis; (2) one-third of the faculty members must have a master’s or doctoral degree; (3) at least 60 percent of the undergraduate courses shall be recognized and have a satisfactory concept obtained in the evaluation proceedings carried out by the INEP; (4) it shall have an institutionalized extension program in the areas of knowledge covered by their undergraduate courses; (5) it shall have a scientific initiation program with a project oriented by doctoral or master’s professors, which may include programs of professional or technological initiation and initiation to teaching; (6) it shall have obtained CI greater than or equal to four in the external evaluation carried out by the INEP; (7) it shall regularly offer four master’s degree courses and two PhD courses recognized by the MEC; and (8) it shall not have been penalized as a result of an administrative supervision process in the last two years.

 

The LDB provides that the following powers are granted to universities and university centers in the exercise of their autonomy, among others: (1) to create, organize and discontinue postsecondary education programs on their premises, subject to the applicable regulation; (2) to establish the curricula for programs, subject to the applicable general guidelines; (3) to establish plans, programs and projects in connection with scientific research, artistic production and extracurricular activities; (4) to establish the number of student offerings available; (5) to create and change their bylaws in accordance with the applicable general rules, as well as to award degrees, diplomas and other certificates; (6) to grant degrees and diplomas; (7) to enter into contracts, agreements and covenants; (8) to approve and execute plans, programs and projects related to works, services and acquisitions in general, as well as manage income according to institutional provisions; (9) to manage available resources and available items as provided for in the act of incorporation, in the laws and in the bylaws; and (10) to receive grants, donations, inheritances, bequests and financial cooperation resulting from agreements with public and private entities.

 

Higher education institutions must adopt the procedures set forth in: (1) Ordinance No. 1,095/2018 to grant diplomas; and (2) Ordinance No. 554/2019 to grant digital diplomas.

 

Distance Learning

 

Distance learning in Brazil is regulated by article 80 of the LDB, by Decrees 5,622 of 2005 and Decrees 9,057 and 9,235, both of 2017, by Ordinance Nos. 11 and 23, both of 2017, and the CNE’s Resolution No. 1, of 2016.

 

Distance learning is defined as the educational method in which didactic and pedagogic processes are conducted through information and communication media and technologies, with students and teachers interacting in educational activities while located in different locations or at different times.

 

Pursuant to the applicable regulations, distance learning is subject to different factors compared to traditional methods, including: (1) reduced transmission costs in commercial channels of sound and audiovisual broadcasting; (2) concession of channels with exclusive educational purposes; and (3) minimal time reservation, with no onus on the public authorities, by the concessionaries of commercial channels.

 

Distance learning can be offered at the following levels and as part of the following educational methods: (1) primary and secondary education, as long as it is used only to supplement learning processes or in emergency situations; (2) education for young people and adults, according to specific legal criteria; (3) special education,

 

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according to specific legal criteria; (4) professional education, covering technical programs at the secondary level and technological programs at the postsecondary level; and (5) postsecondary education, covering graduation, master’s programs, specializations and doctorate studies.

 

Graduation courses (bachelor’s, licentiate and technological) may be offered using distance learning methods whenever a postsecondary institution is regularly accredited with the MEC for this purpose. Currently, there is no educational regulation that bans the provision of distance learning courses. However, there are discussions and legislative proposals aimed at banning the provision of distance learning courses in with respect to health, architecture and law.

 

Pursuant to Decree No. 9,057/2017, institutional accreditation and reaccreditation, as well as the authorization and recognition of courses and their renewal, will be subject to on-site evaluation, with the aim to verify the existence and suitability of the method, infrastructure, technology and personnel that enable the execution of the activities provided for in the Institutional Development Plan and Educational Project of the Course.

 

The educational institutions accredited for the offering of postsecondary education in the distance modality that hold autonomy prerogatives (universities and university centers) do not require authorization for operation of the postsecondary course in the distance modality, but shall inform the MEC about the offering of the course within 60 days of the date of creation of such course, for the purposes of supervision, evaluation and recognition. Also, distance institutions must inform the MEC about the creation of educational centers and the alteration of their addresses.

 

Although distance learning is defined by the absence of direct contact between students and teachers, there are activities that must be conducted on-site, such as tutorials, evaluations, internships, professional practice, laboratory and dissertation defense, which are to be provided in the educational and development projects of the institution and the course. Accordingly, the distance learning institutions must provide the necessary infrastructure for the students to conduct those activities, using the headquarters of the education institution or smaller supporting units throughout the country. Distance learning supporting units are no longer subject to on-site evaluation or required to obtain prior authorization of the MEC in order to be set up or operated. Pursuant to Normative Ruling No. 11/2017, such units can be created by unilateral decision of the institution itself.

 

The distance courses and programs must be projected with the same defined duration for the respective on-site courses. The evaluation of performance of students for the purposes of promotion, conclusion of the course and attainment of diplomas and certificates must be conducted through the conclusion of the programmed activities and on-site exams drafted by the accredited education institution, following procedures and criteria defined in the educational project of the course.

 

The evaluation of the distance learning courses is performed in the same manner as the evaluation of the on-site courses. If there is any irregularity in or noncompliance to any of the previously established conditions, the competent body may initiate an administrative proceeding that may result in one or more penalties, such as: (1) forfeiture of accreditation or reaccreditation authorization to operate as a distance learning institution; (2) intervention; (3) temporary suspension of autonomy prerogatives; (4) initiation of reaccreditation proceedings; (5) reduction of available vacancies within courses; (6) temporary suspension of new student admissions; and (7) temporary suspension of course offerings.

 

Diplomas and certificates for distance learning courses and programs from accredited institutions are valid throughout the national territory, and institutions are not entitled to set different criteria for diplomas issued for distance learning courses and those issued for on-site courses. Only accredited education institutions, public or private, may offer distance courses and programs. It is the MEC’s responsibility to promote the accreditation acts of postsecondary institutions. To act outside the institution’s local geographic reach, the institution shall require an extraterritorial accreditation to the MEC.

 

Institutional accreditation for distance learning courses or programs requires periodic renewal. Also, the accredited institution must initiate the authorized coursework within 24 months from the accreditation, and if the institution does not implement the authorized activities in such time frame, it will be subject to an administrative proceeding that may result in the cancelling of the given authorization.

 

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Pursuant to Decree No. 9,057/2017, postsecondary courses may be offered in the distance learning modality through a partnership between an accredited distance education institution and another company. In this case, applicable regulations establish that educational activities must be conducted in the facilities of the accredited education institution, which will be responsible before the MEC for the regularity of the teaching and learning processes. Accordingly, the education institution must inform the MEC of its partnerships, describing their purpose and most relevant aspects, in order for the MEC to be able to assess eventual irregularities.

 

In any case, distance learning courses and programs are subject to the evaluation rules of the SINAES in the same manner that on-site courses are.

 

It is also important to point out that, recently, Ordinance No. 2,117 of 2019 changed the maximum limit for distance learning hours in on-site courses from 20% to 40% of the overall course load. Courses will still be deemed to be offered on-site even if they include a distance learning portion provided that the students enrolled in the course must be aware of this. This limit does not apply to on-site medical courses.

 

Recently, as a result of the COVID-19 pandemic, Provisional Measure No. 934 of 2020 converted into Law No. 14,040, of August 18, 2020, exempted schools and universities from complying with the minimum daily requirement for school work, so long as they comply with the minimum annual requirement.

 

Regulatory Processes of Postsecondary Education Institutions

 

Accreditation of Postsecondary Education Institutions and Authorization and Recognition of Courses

 

A postsecondary education institution is initially accredited as a college. The accreditation as a university or university center is only granted after the institution has operated as a college, met satisfactory quality standards, including positive assessments in the SINAES, and met all legal requirements applicable to each type of postsecondary education institution, such as minimum graduation rate and labor regime for the faculty.

 

The application for qualification of a postsecondary education institution must be supported by various documents, including:

 

·Supporting entity: (1) incorporation documents, duly registered with the competent body, evidencing its existence and legal capacity, in accordance with civil legislation; (2) certificates of tax and social security compliance; (3) proof of ownership of assets capable of supporting the education institution; (4) financial statements; and (5) a consent form executed by the supporting entity’s legal representative, vouching for the veracity and regularity of the provided information and the financial capability of the supporting entity; and

 

·Postsecondary education institution: (1) an educational development plan; (2) bylaws and internal regulations; (3) identification and qualification of managers, with a description of their academic and administrative experience; (4) a receipt of regularity and availability of the teaching facilities; (5) a plan of accessibility assurance, pursuant to the regulation and followed by a technical report by a competent professional or public body; and (6) compliance with the legal requirements related to the safety of the building, including having an escape route in case of fire, proved by a specific report issued by the competent public body.

 

In relation to the accreditation process of a new postsecondary educational institution and linked course authorizations, the MEC may issue a temporary accreditation act to expedite the operation, pursuant to article 24 of Decree No. 9,235/2017, as long as the supporting entity complies with all the following requirements:

 

·all self-supporting postsecondary education institutions have been reaccredited in the last five years obtaining an average Institutional Concept (Conceito Institucional) greater or equal to 4;

 

·none of its postsecondary education institutions have been subject to administrative penalties by the MEC in the last two years; and

 

·the courses to be offered by the new postsecondary institution must already be offered by other institutions supported by the same supporting entity and duly recognized by the MEC in the last five years with a Course Concept (Conceito de Curso) greater or equal to 4.

 

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Following the initial accreditation as a postsecondary education institution, colleges depend on authorization from the MEC to offer postsecondary education courses. Institutional accreditation requires periodic renewal. Within their autonomy, universities and university centers do not depend on authorization from the MEC to create the majority of postsecondary education courses and campuses in the same city as their headquarters, except for medicine, dentistry, psychology, nursery and law courses, which necessarily must be previously authorized by the MEC. In any other cases, institutions are required to inform the MEC about the courses they offer for purposes of monitoring, evaluation and further recognition. In addition, Ordinance No. 328/2018, as amended by Ordinance No. 1,302/2018, suspended the opening of new undergraduate courses in medicine until 2023.

 

Except for medicine, dentistry, psychology, nursery and law courses, the external in loco evaluation in connection with the authorization for postsecondary on-site courses of the federal education system can be waived after documentary analysis if the following requirements are met: (1) having a CI greater than or equal to 3; (2) absence of an administrative supervision process; and (3) the institution offers other courses in the same area of knowledge which meet the minimum evaluation standards.

 

Requesting authorization for a course must be supported by the following documents, among others: (1) proof of payment of the local evaluation fee; (2) the pedagogic project of the course, outlining the number of positions, classes, description of the program and other relevant academic elements; (3) a list of faculty members, together with the relevant agreements entered into with the education institution, together with their respective titles, working hours and work regime; and (4) proof of availability of the teaching facilities.

 

Universities and university centers may also apply for the accreditation of a campus not located in the same city as their headquarters, provided that it is located in the same state. Such campuses and programs must integrate the same set of universities or university centers and will only enjoy autonomous prerogatives if there is compliance with the same headquarters requirements and if a high-quality degree is shown, through an average CI greater or equal to 4. Therefore, even in the case of universities or university centers, prior authorization from the MEC is necessary to create any courses on campuses not located in the same city as the university’s headquarters.

 

Once authorization for a given course has been issued, postsecondary education institutions, including university centers and universities, must also file a request for the recognition of the course as a condition for the national validation of the respective diploma. The requirement must be filed with the MEC after the midway point of the term established for the completion of the corresponding program and three-quarters completion of such term, and must include the following documents, among others: (1) a pedagogic project, including the number of students and other pertinent academic information; (2) a list of faculty members, listed in the national registry of instructors; and (3) proof of availability of the teaching facilities.

 

Authorization and recognition of courses, as well as accreditation of postsecondary education institutions, must have a limited term and be renewed periodically following the regular evaluation process, currently established according to the evaluation cycles of the SINAES.

 

Our postsecondary education institutions are accredited by the MEC and their courses are duly authorized. We also make every effort to comply with all applicable regulations to maintain our institutions and courses compliant with the MEC.

 

Modification of Supporting Entity

 

Pursuant to Decree No. 9,235/2017 and Ordinance No. 23/2017, modification of a supporting entity occurs whenever there is a change in the supporting entity or its controlling shareholder affecting the decision-making process. Although it no longer depends on the approval of the MEC, the MEC must be informed within 60 days of the consummation of the event for the purposes of updating our registration with the MEC. Such notice must be followed by all the legal documents related to the alteration, duly registered, and the term of commitment executed by the legal representatives of both the current and new supporting entities.

 

If the new supporting entity or controlling shareholder already supports another postsecondary education institution, it must meet the requirements necessary for the accreditation of a postsecondary education institution, which will be assessed by the MEC in the context of the institution’s reaccreditation proceedings, in the period provided for in the accreditation of the transferred postsecondary education institution in force on the date of the modification of supporting entity. Additionally, the LDB also provides that educational institutions must inform the MEC of any change in their bylaws, which must be registered with the competent bodies.

 

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The transfer of programs or courses between postsecondary education institutions is prohibited and may subject the involved entities to penalties such as: (1) suspension of new students’ admission; (2) suspension of the offering of undergraduate or postgraduate lato sensu courses; (3) suspension of the institution’s autonomy to, among other things, create new postsecondary courses and establish course curricula, if applicable; (4) suspension of the license to establish new distance-learning courses; (5) overriding of any ongoing regulatory requests filed by the institution and prohibition of the filing of any new regulatory requests; (6) suspension of the participation in the New FIES; (7) suspension of the participation in PROUNI; and (8) suspension of or restriction on the ability to participate in other federal educational programs.

 

Financing Alternatives for Students: Incentive Programs

 

Programs providing for public funding to students enrolled with private higher education institutions has been a major public policy to expand access to postsecondary education in Brazil, especially for the low-income segment of the population. The most important programs are the following.

 

University for All Program (PROUNI)

 

PROUNI is a tax incentive program created through the Provisional Measure No. 213, of September 10, 2004, later converted into Law No. 11,096, of January 13, 2005, that addresses the exemption of certain federal taxes imposed to postsecondary institutions that grant scholarships to low-income students enrolled in undergraduate courses and technology graduate courses. By granting tax incentives to postsecondary education institutions, PROUNI has played an important role in inciting the growth and private investment in the postsecondary education sector.

 

Private postsecondary institutions may adhere to PROUNI by the execution of a specific agreement with the MEC, valid for 10 years and renewable for the same period. Such agreement must be amended every semester with an additional term establishing the number of scholarships to be offered in each course, unit and class, and what percentage of scholarships shall be granted to indigenous and afro-Brazilians. In order to participate in PROUNI, an educational institution must:

 

·be up to date with its tax obligations; and

 

·comply with the following requirements: (1) offer at least one full-time scholarship to every 10.7 regularly paying students enrolled at the end of the past school year, excluding the full-time scholarships granted through PROUNI or by the institution; or (2) offer one full-time scholarship to every 22 regularly paying students enrolled in traditional and technological graduation courses, provided that it also offers scholarships (25% or 50% of the tuition) in the value equal to 8.5% of the paying students’ annual revenue, available to students enrolled in traditional and technological graduation courses at the school year.

 

The ratio between the number of scholarships and the number of regularly paying students must be complied with annually. If the entity does not comply with the ratio during a school year because of the withdrawal of students, the institution must adjust the number of scholarships in a proportionate manner for the subsequent school year.

 

Pursuant to Normative Ruling No. 1.394, of September 12, 2013, a postsecondary education institution that has adhered to PROUNI is exempt, totally or partly, from the following taxes for the duration of the adherence period:

 

·IRPJ and CSLL with respect to the net income derived from the undergraduate degree courses and extension courses; and

 

·PIS and COFINS, with respect to the revenue derived from undergraduate degree courses and extension courses.

 

In case a postsecondary education institution requires its exclusion from PROUNI, its tax incentives will be suspended from the date of the solicitation and will not be applicable for the entire period of the basis of calculation.

 

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Normative Ruling No. 1,394, of September 12, 2013, introduced new provisions regarding the tax exemptions granted by PROUNI, in particular the form to calculate the extension of the benefits. According to this Normative Ruling, in addition to the tax exemptions obtained by higher education institutions signatories to PROUNI, tax exemptions are calculated based on the Proportion of Effective Occupation of the Scholarships (Proporção de Ocupação Efetiva de Bolsas), or POEB, and the exemption related to IRPJ would be calculated without taking into account the additional 10%.

 

According to Article 7, II, amended by Normative Ruling No. 1,417, dated September 6, 2013, the calculation of the exemption also includes the additional 10% of IRPJ, in addition to the CSLL rate. The amount calculated is the amount of the IRPJ and CSLL exemption, respectively, which may be deducted from the IRPJ and CSLL in relation to the totality of the Company’s activities.

 

Accordingly, with the issuance of Normative Ruling No. 1,417, of September 6, 2013, the IRPJ/CSLL exemption on the Company’s operating income proportionate to the POEB will also include the additional 10% of IRPJ.

 

Moreover, considering that Normative Ruling No. 1,417, dated September 6, 2013, creates a potential limit to the amount of the tax exemption, the application of these new provisions will result in a reduction in value of the tax exemption obtained. Nevertheless, the legality of the provisions introduced by Normative Ruling No. 1,417, of September 6, 2013, is being discussed before the judiciary, with several motions still pending.

 

Other modifications of the fiscal incentive granted by PROUNI were established by Normative Ruling No. 1,476, of July 1, 2014, which also amends the aforementioned Normative Ruling No. 1,417, of September 6, 2013, in order to (1) exclude several amounts from the concept of profit of the holding, which impacts the enjoyment of the exemption related to CSLL and IRPJ; and (2) exclude the POEB from the applicable calculation, specifically for higher education institutions with terms of adherence to PROUNI signed up to June 26, 2011, which also affects the calculation of the exemption specifically enjoyed for the terms of adhesion celebrated in the period prior to that date.

 

Student Financing Program (FIES)

 

The FIES, created by Law No. 10,260, of July 12, 2001, is a MEC program to finance students that cannot bear the total costs of their education. FIES has been the most important program for the expansion of access to higher education in Brazil during the last decade, and it is currently responsible for a significant part of the revenues of the majority of private higher education institutions.

 

FIES consists of funding granted by FNDE to students regularly enrolled in an on-site course of a postsecondary private higher education institutions registered in FIES that has been positively evaluated by the MEC. After a specific selection proceeding, students may be partially or wholly funded by FIES and, in that case, FNDE will be responsible for crediting the correspondent amount due by the student to the private higher education institution.

 

Payments are made with government bonds whose primary purpose is to compensate tax debts from the private higher education institution. In case there are no debts to be compensated, the institution can resell the bonds to the government by means of a specific proceeding that currently occurs on a monthly basis. The frequency of these proceedings could vary according to public financial constraints and the discretion of FNDE.

 

FIES has been substantially reshaped by Law No. 13,530, dated December 7, 2017, and currently the program is not as broad as it used to be. According to applicable regulations, in order to enroll students that have been selected by FIES, private higher education institutions are required to contribute to the fund 13% of the amount due by the student to the institution as consideration for the educational services rendered in the first year of studies. This amount is subject to change in the following years and could vary between 10% and 25% of the consideration due, depending on specific circumstances.

 

As a result of the COVID-19 pandemic, Law No. 14.024 of 2020 suspended the financial obligations of FIES students for the duration of the period of public calamity established by Legislative Decree No. 6 of 2020. Furthermore, several 2020 FIES internal procedure deadlines were extended, including enrollments and contract signings.

 

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University Scholarship Program from Santa Catarina (UNIEDU)

 

UNIEDU is a program of the state of Santa Catarina that provides scholarships for students to attend universities. UNIEDU is governed by articles 170 and 171 of the constitution of the state of Santa Catarina and regulated by Complementary Law No. 583/2012 and Ordinance No. 3155/2017.

 

Pursuant to the abovementioned legislation, the Department of Education of the State of Santa Catarina (Secretaria de Estado da Educação do Estado de Santa Catarina), or the Santa Catarina Education Department, enters into agreements with state-based educational institutions duly accredited by the MEC and registered with the Santa Catarina Education Department that will receive funds for payment of scholarships.

 

Scholarships should be offered to those who meet the following criteria: (1) having attended all secondary school in public schools or private institutions, with a full scholarship; (2) complying with the per capita family income limit established annually by the governor of the state of Santa Catarina; and (3) be selected by the responsible committee appointed by the Santa Catarina Education Department.

 

National Higher Education Evaluation System (SINAES)

 

The SINAES was created by Law No. 10,861 of April 14, 2004, with the purpose of evaluating postsecondary education institutions and undergraduate courses and measuring student academic performance. The main objectives of this evaluation system are to assess the quality of education in the country and to provide guidelines for the MEC to decide upon institutional reaccreditation, recognition and renewal of recognition of courses. Additionally, the SINAES is responsible for improving the quality of postsecondary education in Brazil given that the MEC can identify deficiencies and establish specific conditions for institutions to remedy their issues and resume their operations.

 

The SINAES is monitored and coordinated by the CONAES, and the INEP has a very important role in all processes. The results of the evaluation of postsecondary education institutions and their courses are public and represented on a five-level scale as follows:

 

·Level 5 indicates excellent conditions;

 

·Level 4 indicates more than satisfactory conditions;

 

·Level 3 indicates satisfactory conditions; and

 

·Levels 1 and 2 indicate unsatisfactory conditions.

 

Pursuant to applicable regulations, evaluation processes consist of a preliminary assessment of several conditions relating to the institution and its courses, such as infrastructure, titles of faculty members, work schedule of faculty members and student performance. Every year, the INEP establishes a method to evaluate those elements and for them to correspond to a number in the five-level scale.

 

The preliminary assessment is a complex process based on quality indicators as follows:

 

(a) National Student Performance Examination—ENADE

 

The ENADE is a test applied to a number of students that are completing courses. It evaluates students’ knowledge regarding the content provided in the curricular guidelines of the respective undergraduate course and their skills and competencies. The ENADE’s results are considered in the composition of quality indexes for courses and institutions.

 

(b) Preliminary Course Concept—CPC

 

The Preliminary Course Concept (Conceito de Curso Preliminar), or CPC, is composed of the ENADE score, the Indicator of Difference between Observed and Expected Performance (Indicador de Diferença entre os Desempenhos Observado e Esperado), or IDD, and factors that include teacher titles, the work schedule of faculty staff and infrastructure of the institution. It is an indicator of the state of undergraduate courses in the country. The rules for conducting the on-site verification of teaching conditions are defined annually. Certain courses with a

 

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concept equal to or greater than 3, as defined annually by the MEC, may not receive the visit of the evaluators as a result of which the CPC becomes a permanent concept (the Course Concept). The CPC is released every year for a specific group of courses that consists in the same areas evaluated at the ENADE.

 

(c) General Course Index—IGC

 

The IGC of the institution summarizes in a single indicator the results of the CPC and the evaluation of master’s and doctorate courses of each educational institution. With regard to graduate courses, CAPES indexes are used and adapted to the scale according to a methodology provided by the INEP, given that they are organized in a different manner. The IGC also goes from 1 to 5 and is published by the INEP/MEC, after the release of the results of the ENADE and the CPC. The IGC is a criterion in the accreditation and reaccreditation processes of institutions and also in the authorization process for new courses: institutions with IGCs less than 3, for example, may have their applications for new courses rejected by the MEC. Similarly, the indicator is used to guide the expansion of quality education: institutions with good performance are exempted from the authorization of the MEC to open courses.

 

(d) Indicator of Difference between Observed and Expected Performance—IDD

 

The IDD is intended to provide a reference of the contribution of the course to the learning of each student. For that purpose, it compares the results of the ENADE with the performance of the same student in the ENEM. The indicator has a scale of 1 to 5.

 

Following preliminary assessments, all institutions are typically subject to an on-site evaluation to confirm the results. However, given the size of the system, the MEC gives institutions the option to convert the results of the preliminary assessments into final results and, therefore, forego on-site evaluations. For institutions that obtain unsatisfactory levels, the MEC on-site evaluations are mandatory.

 

Even before the on-site evaluation, the MEC is entitled to apply precautionary measures when preliminary assessments of the institution or course is not considered satisfactory, such as: (1) suspension of new enrollments within the respective course or the entire institution; (2) reduction of vacancies; and (3) suspension of all regulatory proceedings for institutional reaccreditation, new authorizations, recognitions or renewals of recognitions.

 

Should the level be confirmed as less than 3 by the on-site evaluation, the MEC may propose a term of commitment to the institution, in order for it to correct the unsatisfactory conditions within a specific deadline. Failure to uphold, in full or in part, the conditions established in the term of commitment may result in one or more penalties to be applied by the MEC, such as: (1) temporary suspension of the opening of a selection process of graduation courses; (2) disqualification from the operating authorization of the higher education institution or recognition of courses offered; and (3) warning, suspension or cancellation of the mandate of the officer responsible for the action not executed, in the case of public postsecondary education institutions.

 

After the on-site evaluations, institutions and courses obtain definitive quality concepts as follows:

 

(a)an Institutional Concept, which is the result of the on-site evaluation of the institution performed by the INEP; and

 

(b)a Course Concept, which is the result of the on-site evaluation of the course performed by the INEP.

 

Registration of the Brazilian Educational System – SEB

 

The Register was established by Ordinance No. 1,773/2019 and aims to support the formulation, implementation, execution, evaluation and monitoring of public policies.

 

All educational institutions must provide personal data of the academic staff and students, as well as information on the enrollment, attendance and school records of students.

 

School Census

 

The school census is conducted annually by the INEP and the provision of information is mandatory for all public and private education institutions, as provided by the LDB.

 

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Accreditation for Postgraduate Programs

 

Lato sensu

 

Postsecondary education institutions accredited for offering undergraduate courses and that have at least one regular undergraduate course or a stricto sensu postgraduate course can offer lato sensu postgraduate courses in the subjects in which they are accredited, either on-site or through distance learning.

 

The offering of postgraduate programs does not require an authorization to operate, even if it is offered by a college. However, it must be reported to the MEC, through the MEC’s system (e-MEC), within 60 days of the date of creation of such course.

 

The lato sensu postgraduate courses are aimed at students who hold a diploma in an undergraduate course and satisfy the criteria of the institution that is offering the postgraduate course. The postgraduate courses must meet the following requirements: (1) a curriculum with a minimum study load of 360 hours; and (2) a teaching staff composed of at least 30% graduates of stricto sensu postgraduate courses.

 

Stricto sensu

 

The authorization and recognition of stricto sensu postgraduate courses (master’s and doctorates) must be evaluated by CAPES, submitted to the CNE’s deliberation and approved by the MEC.

 

The educational institutions can only initiate master’s and doctorate course activities following publication of the homologation of the CNE’s favorable opinion by the MEC in the Official Gazette.

 

As part of its analysis, CAPES must consider the general requirements and the specific parameters of the subject area to which each course is linked. The general requirements are: (1) alignment of the proposal with the postgraduate planning of the institution; (2) suitability and justification of the proposal for the regional or national development and its economic and social importance; (3) clarity and consistency of the proposal with detailed information on its objectives, area of concentration, lines of research, curricular structure, subject and bibliographic references; (4) clarity of the criteria adopted to select the students, justifications for the profile of the aimed formation and profile of the egress; (5) proof that the teaching staff has academic, didactic, technical and scientific competence and qualifications related to the purpose of the course; (6) a permanent teaching staff to ensure the regularity and quality of teaching, research and orientation activities; (7) indication of up to five intellectual productions of each permanent teacher; and (8) physical and technological infrastructure of teaching and research adequate for the development of the proposed activities.

 

Authorizations of new stricto sensu postgraduate courses must be requested at specific dates, as defined by CAPES and published in the Official Gazette.

 

C.Organizational Structure

 

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 our initial public offering, our Controlling Shareholders held 522,315,196 shares of Vitru Brasil. Prior to the consummation of our initial public offering, our Controlling Shareholders contributed all of their shares in Vitru Brasil to us. In return for this contribution, we issued new common shares to our Controlling Shareholders in a one-to-31 exchange for the shares of Vitru Brasil contributed to us. Until the contribution of Vitru Brasil shares to us, we had not commenced operations and had only nominal assets and liabilities and no material contingent liabilities or commitments.

 

After accounting for the new common shares that were issued and sold by us in our initial public offering, we had a total of 23,058,053 common shares issued and outstanding as of December 31, 2020. 16,848,874 of these shares were common shares beneficially owned by our Controlling Shareholders, 209,179 of these shares were common shares beneficially owned by members of our management and other shareholders who acquired shares prior to our initial public offering, and 6,000,000 of these shares were common shares beneficially owned by investors who acquired shares in our initial public offering.

 

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The diagram below depicts our organizational structure as of the date of this annual report:

 

 

For more details about our organizational structure please see “Presentation of Financial and Other Information—Organizational Structure” and refer to note 2.2 to our audited consolidated financial statements.

 

D.Property, Plant and Equipment.

 

Intellectual Property

 

We rely and expect to continue to rely on a combination of copyright, trademark and trade secret laws, as well as employee and third-party non-disclosure, confidentiality and other types of contractual arrangements to establish, maintain and enforce our intellectual property rights, including with respect to our proprietary rights related to our products and services. In addition, we license technology and copyright from third parties.

 

As of December 31, 2020, we owned 29 trademarks and had four pending trademarks applications in Brazil, including “Vitru” and “Uniasselvi” and a number of additional brands which we use in certain parts of Brazil, such as “Fameblu,” “Univinci,” “Fameg,” “ICPG” and “Asselvi”. As of the date of this annual report, two of four pending trademarks applications in Brazil were granted by the Brazilian Trademarks and Patents Office (Instituto Nacional da Propriedade Industrial). We also have the right to use of a number of registered copyrights, most notably copyrights for physical and digital teaching materials.

 

Properties

 

Our corporate headquarters, which include our academic core and business operations are located in the state of Santa Catarina. Our corporate headquarters consist of 3,977.43 square meters of space under a lease that expires in 2022. We also lease 758.10 square meters in the city of Florianópolis, in the state of Santa Catarina, for certain administrative activities and our principal executive offices under a lease that expires in 2024. We believe our facilities are sufficient for our current needs.

 

In addition to our corporate headquarters and to our corporate center, and as of December 31, 2020, we leased all operational and administrative facilities. We believe that our facilities are suitable and adequate for our business as presently conducted, however, we periodically review our facility requirements and may acquire or lease new space to meet the needs of our business or consolidate and dispose of facilities that are no longer required.

 

Item 4A. Unresolved Staff Comments

 

Not applicable.

 

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Item 5. Operating and Financial Review and Prospects

 

The following discussion of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and the notes thereto as well as the information presented under “Item 3. Key Information—A. Selected financial data.” The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including those set forth in “Item 3. Key Information—D. Risk factors.”

 

A.Operating Results

 

According to the latest available data published in October 2020 by the MEC, we are the leading pure distance learning education group in the postsecondary digital education market in Brazil, based on the number of enrolled undergraduate students as of December 31, 2019, for the second consecutive year.

 

Between 2016 and 2020, we grew at a CAGR of 41.8% in terms of enrolled students in our undergraduate distance learning programs, as shown in the chart below.

 

 

 

Note: The data presented in this chart for the period from 2010 to 2019 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 annual report.

 

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 84.8% of our hubs, are remunerated by their respective share represented by a given percentage over the tuition fee collected by us from students. The total amount to be transferred to the hub partners on a monthly basis is derived from the pricing terms agreed upon with each student on the service contract. This percentage is similar across all our partnership agreements and varies in accordance with the type of course the student is enrolled in, which are higher for continuing education courses and lower for undergraduate courses. In addition, this percentage is higher in the beginning of the hubs’ operations and decreases throughout their life cycle, thus reducing their payback period and increasing the attractiveness of their investment. 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 to our hub partners. We have built and nurtured strong relationships with our 188 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. As of December 2020, our CI score, which is measured and published by the MEC, and is based on institutional planning

 

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and development, academic and management criteria, was five, in line with our 2019 CI score of 5, (on a scale of 1 to 5), enabling us to open up to 500 hubs per year, 250 hubs at each of our two institutions accredited to offer distance learning undergraduate courses, compared to a maximum of 150 and 50 new hubs per year for 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 given 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 numbers included in the body of the above figure show the actual student base (in thousands), within each cohort, as of the end of each semester between the first semester of 2017 and the second semester of 2020. 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 mature hubs (which comprises the hubs existing prior to 2017) grew at a CAGR of 1.7% between the first semester of 2017 and the second semester of 2020, while our 2017 cohort (which comprises the hubs opened in 2017), 2018 cohort (which comprises the hubs opened in 2018) and 2019 cohort (which comprises the hubs opened in 2019) grew at a CAGR of 81.3%, 98.9% and 95.9%, 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.

 

Our Growth

 

We remain focused on our primary mission: to provide students full access to distance learning education and improve their experience through a disruptive student-centric 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

 

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education for residents of cities in the countryside. Based on the most recent available data of the MEC, as of December 31, 2020, our growth rate for the period from 2015 to 2019 was twice that of the private digital education market (compared to the five biggest education companies in 2015). 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, 2020, our network consisted of 709 hubs, compared to 545 hubs as of December 31, 2019 representing an annual growth rate of 30.1%. As of December 31, 2018, our network consisted of 370 hubs, compared to, respectively, 221 hubs and 72 hubs as of December 31, 2017 and December 31, 2016, representing a CAGR of 77.1%. 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 2018, 2019 and 2020 cohorts. 88.3% of our hubs were opened in the last three years, or since the second semester of 2017, 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, 2020 and 2019, we operated 709 and 545 hubs at different maturation stages, respectively.

 

·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 Enrolled Students

 

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 enrolled students from distance learning as a percentage of our total enrolled students.

 

For the year ended December 31, 2020, 2019 and 2018, enrolled students related to distance learning businesses was 97.4%, 96.1 and 94.5% respectively, of our total enrolled students.

 

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Enrolled Students

 

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, 2020, 2019, 2018, 2017 and 2016, we had 309,560, 240,946, 189,295, 140,363 and 115,325 enrolled students, respectively, representing a CAGR of 28.0%.

 

In our distance learning undergraduate courses, our first core business, we had 256,953, 195,613, 148,711, 106,576, and 81,406 students as of December 31, 2020, 2019, 2018, 2017 and 2016, respectively, representing a CAGR of 33.3%. In our distance learning graduate courses, our second core business, we had 44,570, 35,952, 30,227, 22,910 and 21,108 students as of December 31, 2020, 2019, 2018, 2017 and 2016, respectively, representing a CAGR of 20.5%.

 

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, 2020 and 2019 consisted of 709 and 545 hubs across all Brazilian states, respectively, 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 (2016-2020) of 77.1%.

 

The following table sets forth the number of hubs for the years presented.

 

   As of December 31
   2020  2019  2018  2017  2016
Number of Hubs    709    545    370    221    72 

 

Theoretical Maturation Index

 

We believe that the number of students per hub in each cohort is useful in showing hub maturation and the ramp-up in our hubs’ operations as they attract and maintain new students. We expect mature hubs to have approximately 800 students. We have developed a theoretical maturation index to assess our hubs’ progress against our expectations.

 

We calculate the theoretical maturation index as the actual number of students per hub not yet considered mature (which we call “expansion hubs”) divided by the theoretical number of students which we expect such hub to achieve once it has matured (i.e., 800 students). The index comprises all expansion hubs as of the end of each period, and it can therefore decrease in a given quarter if new expansion hubs are opened.