Risk Factors

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Investment in our securities involves exposure to certain risks. Before making any investment decision on any of our securities, potential investors must carefully review all information in this Reference Form, the risks mentioned below, as well as our financial statements, quarterly earnings release and notes. Our business, financial condition, operating results, cash flow, liquidity and/or our future business may be adversely affected by any of the risk factors detailed below. The market price of our securities may decrease due to the occurrence of any of these and/or other risk factors, in which case potential investors may lose all or a substantial part of their investment in our securities. The risks detailed below are those we know and believe that, on the date of this Reference Form, may materially and adversely affect us. In addition, additional risks not currently known or considered irrelevant may also adversely affect us..

For purposes of this section "4. Risk Factors" and section "5. Market Risks", unless expressly stated otherwise or if the context so requires, the mention that a risk, uncertainty or problem may cause or will cause an "adverse effect" or "negative effect" for the Company, or similar expressions, means that such risk, uncertainty or problem could have a material adverse effect on our business, financial condition, operating results, cash flow, liquidity and/or future business and our subsidiaries, as well as the price of our securities. Similar expressions included in this section "4. Risk Factors" and in section "5. Market Risks" should be understood in this context.

Notwithstanding the subdivision of this section "4. Risk Factors" and section "5. Market Risks", certain risk factors that are in an item may also apply to other items in this section "4. Risk Factors" and section "5. Market Risk".

a. to the issuer

Due to the greater exposure to the Federal Government from the participation in programs such as FIES, PRONATEC and PROUNI, as detailed below, any delay or suspension of onlending, as well as changes in the rules, could adversely affect our cash flow and, therefore, our business.

We face significant competition in each course we offer and in each region where we operate. As a result, if we are not efficient, we may lose market share and profitability.

Due to the increased penetration of the Higher Education Student Fund ("FIES"), a program created by MEC, operated by the Brazilian Education Development Fund ("FNDE"), to finance low-income students in undergraduate and technological courses in private institutions of higher education, as a financing option to our students, our exposure to the transfer of FIES’ monthly tuitions by the Federal Government became significant as of 2012. Additionally, the Brazilian Program of Access to Technical Education and Employment ("PRONATEC"), created by the Federal Government in 2011, was adopted with the purpose of expanding the offer of vocational and technological education courses. In addition, we joined the "University for All" Program ("PROUNI"), with the Federal Government granting financing policies and tax benefits. PROUNI, institutionalized by Law 11096/05, has the purpose of granting full and partial scholarships to low-income students, in undergraduate and technological courses, in private institutions of higher education, offering, on the other hand, exemption of some federal taxes from institutions that join PROUNI.Our competitors may offer programs 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 campuses with better infrastructure, or charge lower or, in the case of public post-secondary education institutions, not charge tuition. 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. 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.

If the Federal Government decides to extinguish or reduce the benefits of PROUNI and FIES, or if we are unable to meet PROUNI’s requirements and, in FIES’ case, students are unable to meet the program’s requirements or the Government extends the deadlines of reimbursements or changes the rule adversely, our operating results may be affected and we may be compelled to pay taxes which we are currently exempted from and this would reduce our revenue with the lower funding of students coming from FIES.

Finally, recent changes in the rules to renew FIES’ agreements, as well as the end of the system for students to contract new loans and changes in PROUNI’s legislation may negatively affect the number of students in our courses, leading to a decrease in our revenues, as occurred with the changes observed during 2015 in PRONATEC.

As of December 2014, the Federal Government, through the Ministry of Education, reduced its investments in FIES and PRONATEC, reducing the number of vacancies available for both programs. As a result, the number of students in the Company’s technical courses went from 3,000 on December 31, 2015 to 400 on December 31, 2016 and to 300 on December 31, 2017. The FIES student base went from 45.2% of the undergraduate student base on December 31, 2015 to 44.9% on December 31, 2016 and 41.5% on December 31, 2017.

As of 2018, the Company joined the new model of student loans from the Federal Government entitled "New FIES". Such as the old program, the new loan also grants several financing limits throughout Brazil, focusing on the North, Northeast and Midwest regions. The new program is divided between Public FIES, which is under the control and responsibility of the Federal Government, and ‘Private FIES’ (P-FIES), which is controlled by public and private financial institutions. In relation to Public FIES, when joining the program, the HEIs are required to join the FIES Guarantee Fund (FG-FIES), which replaces FGEDUC. In addition to joining FG-FIES, institutions will have an increased risk exposure in the new program. For loans granted as of 1H18, the HEIs maintainers who joined FIES will assume the risk of the loan, as solidary debtors, and must commit themselves to make contributions to FG-FIES by using the following percentages (a) 13% (thirteen percent) in the first year, (b) between 10% (ten percent) and 25% (twenty five percent) from the second to fifth year, (c) as of the sixth year of the maintainer in FG-FIES, the percentage of participation may not be less than 10% (ten percent).

The increased in the levels of non-payment of our monthly tuitions may jeopardize our revenues and our cash flow.

We rely on the full and timely payment of the monthly tuition we charge our students for the continuity of our business. Therefore, the increase in the non-payment levels of our students in the payment of the monthly tuitions or in rebuilding the debts may compromise our cash flow and our ability to meet our obligations. The increased in the non-payment levels may negatively affect our cash flow and, therefore, may harm business. The allowance for doubtful accounts as a percentage of net revenue increased from 4.7% on December 31, 2015 to 4.3% on December 31, 2016. At December 31, 2017, due to the prolonged increase in unemployment rates and the resulting rise in the NPL, PDD stood at 5.2% as a percentage of net revenue.

We may be harmed if we cannot identify, open, install and manage new units under economically efficient conditions or obtain the necessary regulatory acts for authorizations or accreditations of such units in a timely manner. If we are not able to implement our expansion plan by opening new units in the planned manner, our business may be adversely affected.

Our strategy includes the organic expansion through opening new units and integrating them in our teaching network. Thus, our expansion plan creates significant challenges to the maintenance of our educational quality and culture, due to the degree of complexity and difficulty in efficiently managing many units and courses. In this sense, we may not be able to maintain our current quality standards, which would mean reducing our market share and, therefore, reducing our efficiency and profitability.

In addition, opening new units leads to major challenges and requires large investments in infrastructure, marketing, personnel and other pre-operating expenses, specially identifying new facilities (units), both for rental and acquisition. In this sense, we prioritize the identification of strategic locations, the negotiation of the acquisition or lease of properties, the evaluation of the need to build or renovate of all facilities, especially libraries, laboratories and classrooms, as well as obtaining operating licenses, hiring and training of teachers and employees and investing in administration and support.

In addition, before opening or operating the new units, we are required to accredit such units in MEC, as well as to approve and authorize our new courses to be able to operate, recruit students and issue degrees and certificates. Therefore, if we are not able to make the necessary investments to open new units to comply with all specifications of MEC, or if MEC imposes to this processes requirements, restrictions, goals or impediments to the approval of our requests that result in the delay of authorization, accreditation or recognition of such units, our business may be impaired.

We may not succeed in our strategy to expand our activities in the Distance Learning segment ("EAD").

On December 23, 2013, our university center, UNINASSAU, was authorized to offer the EAD model, and on December 7, 2015, the first course recognition was granted. On November 30, 2015 the University of Guarulhos was authorized to offer EAD. Given this, we may have difficulties in operating courses in the EAD model, as well as promoting technological changes and investments that this model of education demands. Online product technology, including for the EAD segment, evolves rapidly and therefore we will have to modify and update our products and services quickly to adapt to the new market practices and standards expected by the students. In this sense, our strategy may be jeopardized if our competitors, current or future, introduce products or service platforms that are superior to ours and our funds availability is not enough to develop and implement the technological changes required to maintain our competitive position.

On April 24, 2017, MEC published Decree 347, which stipulates that the Office for Regulation and Supervision of Higher Education (SERES) may authorize provisional acts, to accredit poles of in-person support, in addition processes to amend the accreditation, exclusively in cases where these processes are in regular process in the e-MEC System and in the Evaluation phase by INEP, for more than 2 (two) years, without performing the on-site evaluation, or, for more than 1 (one) year, with at least 4 (four) attempts to establish commissions, without evaluation, verified by the institution.

On June 21, 2017, the Ministry of Education (MEC) published in the Federal Official Gazette, the Regulatory Decree 11, which governed the Presidential Decree 9.057 of May 25, 2017, which provides that Higher Education Institutions (HEIs) accredited for EAD with Institutional Grade (CI) of 4 or 5 can open from 150 to 250 new poles of distance learning per year, respectively.

Since the publication of this Regulatory Decree 11, Ser Educacional now has the Centro Universitário Maurício de Nassau de Recife, Centro Universitário Maurício de Nassau de Maceió, Universidade Guarulhos - UNG/UNIVERITAS, and Universidade da Amazônnia which will allow the expansion of the number of EAD poles according to the criteria established in Regulatory Decree 11.

In addition to keeping up the technological innovations, the success of EAD also depends on the population’s easy access to Internet at an affordable cost, as well as on technological factors beyond our control. If the internet access is made difficult or available at a higher cost than the current, or if the number of people interested in educational services via Internet does not increase, we may not be able to implement our growth strategy in EAD services and, therefore, we’ll not be able to satisfactorily implement our growth strategy.

We face a significant competition in each course we offer and in each region in which we operate; therefore, if we are not efficient, we may lose market share and profitability.

We compete with colleges, universities, public and private university centers, distance learning institutions, as well as with alternatives to private higher education, such as philanthropic entities, which are exempted from collection of certain taxes. According to the ‘Sinopse Educação Superior 2015’, published by the Brazilian Institute of Educational Studies and Research Anísio Teixeira (INEP), there were 2,407 institutions of higher education in Brazil, 296 public and 2,111 private.

Our competitors may offer similar or better courses, have more resources, have more prestige in the academic community, have more conveniently located units and better infrastructure, charge lower tuition fees, or do not charge tuition fees, when a public higher education. We may be required to reduce our monthly fees or increase our operating expenses to retain or attract students or seek new market opportunities. We cannot ensure that we will be able to successfully compete with our current and future competitors. If we cannot keep our competitive position or answer efficiently to the competitive pressures, our revenues may decline, our profitability may be compromised, and we may lose our market share.

We may not be able to identify and acquire new higher education institutions or meet our strategic and financial purpose for any intended acquisition.

We intend to acquire higher education institutions as part of the expansion strategy of our operations, including acquisitions that may be significant in size and/or strategic relevance. We may not be able to continue to identify higher education institutions that offer adequate and/or favorable acquisition opportunities when we wish to carry them out. In addition, past and present acquisitions involve several risks and challenges that may have a material adverse effect on our business, especially because, among others:

  • the acquisition may not contribute to our commercial strategy or the image of our institution;
  • the acquisition may be subject to the authorization of competition authorities, which may refuse to accept or impose restrictions;
  • we can face a material contingent liability due to the legal proceedings of the units acquired, as well as regulatory issues related to MEC;
  • the acquisition process may be time consuming and consume more resources and/or require additional time and effort from our management, diverting the focus of the management from our operations;
  • investments in acquisitions may not generate the expected returns;
  • the business model of the acquired institutions may be different from ours, and we may not be able to adapt these models to ours or to do so efficiently;
  • acquisitions may generate goodwill, the amortization of which will result in the reduction of our net income and dividends; and
  • the transfer of the maintenance resulting from the sale of control or corporate restructuring must be later ratified by the MEC.

We may need additional resources to continue our expansion strategy. Therefore, if we cannot obtain the due financing to complete any potential acquisition and implement our expansion plans, we will not be able to fully implement our growth strategy.

We may not be able to satisfactorily integrate and manage the institutions and/or units purchased.

In the process of integrating the acquired institutions and/or units with existing ones, we can face significant challenges, such as managing a larger number of geographically dispersed employees and efficiently creating and implementing uniform controls, procedures and policies, as well as additional integration costs. If the integration of the institutions and/or units acquired in our operations and the management, disclosure and application of our business strategy in such new units, we may not achieve the benefits we expect to obtain from the acquisitions. We may also not be able to integrate the faculty and staff with different professional backgrounds and corporate cultures, and our relationship with current and new faculty and staff may be jeopardized. In addition, the integration of new units acquired may be affected due to the collective bargaining in each region, including pressure from unions. If we are not able to efficiently manage our growth through acquisitions, our business could be significantly jeopardized.

We may not be able to update and improve our learning project and continue to offer a good cost-benefit ratio to our students.

Our curricula and teaching programs are focused on the academic training to empower students to access the job market, providing better employability conditions. Thus, to set us apart from the competition, we regularly update our curricula, as well as develop new teaching programs, including the adoption of new technological tools. If we are unable to adjust to the demands of our students and the market, these aspects may make our courses no longer acceptable in the future. In addition, we may not succeed in introducing new teaching programs at the same speed as our competitors or as quickly as employers’ demand. If we do not adequately respond to changes in market demands due to financial constraints, fast technological changes, or other factors, our ability to attract and retain students may be undermined, given that the cost-benefit ratio of our costs may be questioned

We depend on the members of our Management and we may not be able to retain or replace them with people with the same experience and qualification.

Part of our success depends on the skills and efforts of our Management. However, our senior managers and employees may step aside in the future. If senior managers or employees no longer wish to be part of the management of our business, we may not be able to hire equally qualified professionals. The loss of members of our Management and our inability to hire professionals with the same experience and qualification may have a detrimental effect on our business.

An increase in the dropout rate of our students may adversely affect our operating results.

We believe that dropout rates are mainly related to personal reasons, the country’s socioeconomic conditions, and the financial condition of our current and potential students. Significant deviations in our estimates of the dropout rates of our students may affect our efforts to attract new students and these efforts may not enough to make it possible for us to achieve the revenues expected by us. Thus, a possible increase in the dropout rate and/or non-renewal of enrollment may reduce our revenues, impairing our operating results.

We may be disadvantaged in certain unfavorable negotiations in collective bargaining agreements signed between the unions representing our teachers and employees and the trade unions of the economic categories that represent our teaching institutions.

Our expenses with personnel and social charges represent most of our cost of products and services rendered, and, for the full year ended December 31, 2017, these expenses accounted for 68% of our costs. Our teachers and administrative staff are represented by trade unions. The collective bargaining agreements regulate the duration of the class, the minimum remuneration, vacation and direct benefits for teachers and administrative staff and are subject to annual renegotiation and may substantially change in the future. Thus, we may be jeopardized in case of negotiations unfavorable to us with respect to said collective agreements. We may also be affected if we do not have a good relationship with the unions of teachers or administrative staff or if we face strikes, work stoppages or other labor contingencies on the part of our teachers or employees.

Finally, we may not be able to pass onlend to the tuitions of our students an increase in costs resulting from the renegotiation of collective agreements, which could have an adverse effect on our business.

We may be held accountable for certain events in our units, which may have a detrimental effect on our image, our results and, therefore, our business.

We may be held accountable for acts by directors, teachers and employees. In case of accidents, injuries or other damages to students in our units, we may face claims on the grounds of negligence, for example, not having the due supervision of our facilities, or that we have been in any way, responsible for such accidents, injuries or damages, as well as for the noncompliance by directors or employees with specific laws of MEC and/or regulatory acts of our courses. We may also face allegations that teachers or other employees have committed moral or sexual harassment or other unlawful acts against other employees or against students. In these cases, our insurance coverage may (i) not provide us with protection against these types of claims; (ii) not be enough to cover any indemnities that may be due or (iii) be non-existent for a certain act or fact. We also can’t guarantee that in the future we will be able to renew our coverage under the same conditions. Liability lawsuits can affect our reputation and adversely affect our business and our financial results. Finally, we may be subject to lawsuits brought by students and/or former students, alleging possible damages to rights provided for in the Consumer Protection Code (Law 8078, of September 11, 1990, as amended). The mere existence or disclosure of such lawsuits, even prior to the substantiation of the related facts, may damage our image, decrease the enrollment rates, increase the student’s dropout rates, involve substantial expenses, and divert the time and attention of our management; which may adversely affect our operating results and our financial condition.

Our success is linked to our ability to follow and adapt to technological changes in the educational segment and to the proper and uninterrupted operation of our technological infrastructure.

Our information technology systems and tools may become obsolete or insufficient. In addition, we may find it difficult to monitor and adapt to the technological changes that may occur, especially in the distance learning segment, which is affected by the fast-changing technologies, as well as changes in the technological needs and expectations of our students, students and market standards.

Our competitors may introduce new products or service platforms that are superior to those we offer, and our success depends on our ability and efficiency to improve our current products and develop new services to keep a competitive position in the market.

In addition, our technological infrastructure may be affected by unauthorized access, hacking and other security breaches. A user who circumvents security measures may misappropriate proprietary information or lead to disruptions or malfunctions in operations. As a result, we may need to incur substantial expenses to protect ourselves against the threat of such security breaches or to solve the issues caused by such failures.

Finally, our business depends on the due and uninterrupted operation of our information technology infrastructure. Several issues related to our information technology structure, such as viruses, hackers and disruptions in our systems, and technical difficulties related to our satellite transmissions may adversely affect our business.

If we cannot keep the quality of teaching and infrastructure in our network or if we don’t get positive grades for our units and our students, we may be adversely affected.

The faculty is key to maintain the quality of our courses and our reputation. There is a shortage of qualified teachers in the market, which leads to a fierce dispute to hire these professionals. We cannot guarantee that we will be able to retain our current teachers or recruit new teachers who meet our quality standards, especially as we continue to expand our operations geographically.

In addition, the quality of the learning projects of our courses and the infrastructure of our units are also key for our teaching quality.

Likewise, we cannot guarantee that (i) we will find new properties with the proper infrastructure; (ii) we will be able to install the proper infrastructure in properties acquired in the future; (iii) we will have enough resources to do so in our expansion process; or (iv) we will be able to develop learning projects with the same level of those we currently have for new courses. In this sense, we may be adversely affected due to the lack of (i) qualified teachers; (ii) proper infrastructure; or (iii) learning projects for new courses that are in accordance with our business model and with the parameters established by MEC. In addition, our business may also be affected if it is perceived, in one or more of the markets in which we operate, that there has been a decline in the quality of our education in one or more of our markets.

In addition, we and our students are often evaluated and scored by MEC. If our units and courses or our students receive from MEC lower grades than those of previous years, in any of its evaluations, there may be a reduction in our number of enrollments due to the perception of the decrease in the quality of the education that we offer. Therefore, any decrease in the result of our evaluation in the General Index of Courses or ENADE could damage the image of our brand, which may negatively affect our operating results and our financial condition.

Finally, if any of our courses are rated as unsatisfactory, we may enter into a commitment agreement between the higher education institution and MEC, including goals, measures and deadlines to correct the unsatisfactory conditions. The full or partial non-compliance with the conditions prescribed in the commitment term may result in penalties applied by MEC, which include the temporary suspension of the admission process of undergraduate courses to the annulment of the accreditation or re-accreditation of the institution and operating authorization of our courses, which may adversely affect our operating results and our financial condition.

We are subject to supervision activities of the Ministry of Education and, therefore, we may suffer the applicable sanctions, as listed below, due to any non-compliance of regulatory requirements.

The supervision activity of institutions of higher education and undergraduate and sequential courses in the federal education system was instituted by Law 10861, of April 14, 2004, and regulated by Decree 5773, of May 9, 2006. They are responsible for supervising activities related, respectively, undergraduate and sequential courses, higher education courses of technology and distance learning courses. The Offices of Higher Education, Professional and Technological Education and Distance Learning are the bodies of the Ministry of Education responsible for supervising activities related elated, respectively, undergraduate and sequential courses, higher education courses of technology and distance learning courses. The Office of Higher Education has wo types of supervision: common and special.

Common supervision originates from reports and complaints from students, parents and teachers, as well as from government agencies and the press, involving isolated cases of institutions and courses with indications of irregularities or deficiencies. It is worth noting that we are subject to these reports and complaints.

Special supervision, in turn, is initiated by MEC itself, based on its indicators of regularity and quality of higher education, and includes more than one course or institution, grouped according to the criteria chosen for the supervision. These criteria may include unsatisfactory results in the Brazilian Student Performance Exam and the Difference Indicator of Observed and Expected Performance, the background of course evaluations by the Brazilian Institute for Educational Studies and Research, as well as the compliance with specific legal requirements, such as the minimum percentage of masters and doctors in universities and university centers.

Our success depends on our ability to operate in strategically located properties and with easy access to public transportation for our students.

We understand that the location of our units is an important factor in the choice of the teaching institution by the students, due to the difficulty of urban mobility in many Brazilian cities and the commute expenses being relevant in the students’ family budget. In this way, identifying, renting and/or buying well-located properties is considered a strategic factor of our business. In this sense, we cannot guarantee that in the future we will be able to retain our current properties or acquire new properties that are well located. In the same way, it is possible that the costs related to the acquisition of new properties (improvements, renovations, etc.) and the rental prices of these properties will increase, which could negatively affect our profitability. We also cannot assure that the locations of our units will keep the potential of attractiveness and convenience due to eventual demographic and socioeconomic changes in the regions where we already operate.

Unfavorable decisions in judicial, administrative or arbitration proceedings may adversely affect us.

We are and may be a party to judicial, administrative and/or arbitration proceedings in civil, tax and labor matters, including our suppliers, students, faculty and/or environment, competition and tax authorities, among others, arising from our business in general as non-recurring events of a corporate nature, tax nature, regulatory nature, among others. We cannot guarantee that the results of these proceedings will be favorable to our interests or that we will have provision, partial or total, for all liabilities that may arise from these lawsuits.

Decisions contrary to our interests that eventually reach substantial amounts may adversely affect our results and the price of our shares.

Part of the properties we occupy is in the process of obtaining or renewing city permits and the fire department.

To occupy and use a building we must obtain the license proving the regularity of the construction work, represented by the Permit of Conclusion (Habite-se) or equivalent certificate, issued by the City in which the property is located. In addition, non-residential properties must have the following licenses to operate regularly: (i) Permit and License of Use and Operation, issued by the due Municipal Government; and (ii) Inspection Order of the Fire Department, issued by the Fire Department.

The lack of such permits may lead to penalties ranging from fines to, as the case may be, the need to demolish the area built irregularly or, worst case scenario, the closure of the respective unit. The possible imposition of penalties in relation to our units, especially the closure of a unit, could have a detrimental effect on our activities. In addition, in case of an accident, the absence of these licenses may lead to civil and criminal liability, as well as the cancellation of any insurance policy of the properties in question, as well as possible damages to the Company‘s image.

Part of the properties that we occupy have lease agreements or amendment under registration at the due enrollments and part of the lease agreements entered by the Company do not have a lifetime clause.

Part of the properties occupied by the Company are under registration of their lease contracts in the due enrollments. In addition, part of the lease agreements entered by the Company does not have a lifetime clause.

The registration and filing of lease agreements on enrollments may take longer than expected or even not occur due to any requirement or impediment unknown to us. Such registration or filing is important given that, if the leased property is sold to third parties, the buyer is required to respect the lease for the entire period of lifetime provided in the agreement, provided that the agreement has: (i) a fixed period; (ii) a lifetime clause; and (iii) is registered with the due Properties Notary Office. In addition, in case of the sale of leased properties, the lessee has the preference to purchase the property on equal terms with third parties. However, a tenant who does not have his/her preemptive right respected can cancel the sale of the property only if the lease is registered at the due Property Notary Office. Finally, if the property sold has no lifetime clause in the lease agreement, we may have to relinquish the property in up to 90 days if the purchaser of the property reports this lease agreement.

Therefore, the lack of lease agreements filed or the termination, at any time, of the agreements for an indefinite period may result in the loss of the right to such properties used by us and, therefore, undermine the development of our activities and our results.

Part of the lease agreements of the properties where our units are located were entered for less than five (5) years or have an indefinite term.

According to Law 8245, of October 18, 1991, as amended, the lessee is entitled to the renewal action that assures the right to renew the lease for equal subsequent periods. Generally, to propose this proceeding, it is necessary that: (i) the non-residential lease agreement has a fixed term equal to or greater than five (5) consecutive years or, if there is more than one agreement or amendment with the same property, whose aggregate terms results in a minimum term of 5 consecutive years; (ii) the lessee is developing the same activity in the property for a minimum period of 03 (three years); and (iii) the renewal proceeding is proposed from 01 (one) year to 06 (six) months from the date of termination of the term of the lease. In case of properties whose lease agreement has a term of less than five (5) years, it would not be possible to propose the renewal proceeding, so that at the end of the term of the agreement the lessor could refuse to renew the lease.

In case of properties with a term of less than five (5) years, it would not be possible to propose the renewal proceeding, so that at the end of the term of the agreement the lessor could refuse to renew the lease. In addition, in the cases of units operating in properties whose lease is in force for an indefinite period, the lessor may terminate the agreement by notifying the lessee thirty (30) days in advance. The discontinuance of the activity in a certain unit, due to the termination of the lease of the said property could lead to negative effects in our activities, as well as our results.

Our indebtedness may adversely affect our business.

On December 31, 2017, our total consolidated gross debt was of R$459.1 million, considering loans, financing and debentures payable and financial commitments related to the acquisitions. Our consolidated indebtedness may:

  • limit our ability to obtain new financing;
  • require us to dedicate a substantial portion of our cash flow to serve our debt, which may impair our ability to use our cash flow to finance working capital, capital expenditures and other general corporate requirements, as well as compliance of our obligations;
  • limit our flexibility to plan and react to changes in our business and the industry in which we operate;
  • put us at a competitive disadvantage against some of our competitors who have less debt than we do; and
  • increase our vulnerability to negative economic and industrial conditions, including changes in interest rate or a decline in our business or economy.

In addition, we have loan agreements with restrictive covenants that, in general, require the maintenance of economic and financial rates at certain levels (covenants). The non-compliance with these restrictions may lead to early maturity of the debt.

The applicable law establishes that acquisition operations that comply with certain legal requirements must be submitted to the approval of the Administrative Council for Economic Defense ("CADE").

According to Article 88 of Law 12529, of 2011, subsequently amended by Interministerial Decree 994, of 2012, concentration acts must be submitted to CADE for prior approval in which, cumulatively: (i) at least one of the groups involved in the operation had, in the last balance, gross annual revenues in the country, in the year prior to the operation, in the amount of R$750 million and at least one other group involved in the operation had in the last balance, gross annual revenues in the country, in the year prior to the operation, in the amount of R$75 million.

Thus, CADE may not approve our future acquisitions or may impose costly obligations as a condition for the approval of such acquisitions, such as the sale of part of its operations or restrictions on how it operates or markets in which it operates, which may adversely affect our operating results and our financial condition

Due to this strategy of expansion through acquisitions of new institutions, we may need additional resources to continue our expansion strategy. Therefore, if we cannot obtain the due financing to complete any potential acquisition and implement our expansion plans, our growth strategy will be jeopardized.

b. To its Parent Company, direct or indirect, or Control Group

We have a direct controlling shareholder, with approximately 53% of the voting capital, whose interests may conflict with the interests of our investors.

We have a direct shareholder holding an absolute majority of the voting capital. This controlling shareholder has the power to, among other things, elect a majority of our Board of Directors and establish the outcome of resolutions that require the shareholders’ approval, including related party transactions, corporate reorganizations, sale of asset, partnerships and payment of any future dividends, subject to the mandatory dividend payment requirements imposed by the Brazilian Corporation Law. Our controlling shareholder may have an interest in making acquisitions, selling assets, partnerships, seeking financing or similar transactions that may conflict with the interests of our other investors and lead to a material adverse effect on our activities, financial condition and operating results.

Part of the properties we occupy is owned by a company belonging to our controlling shareholder. Thus, we are exposed to conflicts of interest, since the management of these properties may conflict with our interests, of our controlling shareholder and of our investors.

Some properties in which our units are located are owned by a company controlled by our controlling shareholder, so the interests of our controlling shareholder in the management of such properties may conflict with our interests, as well as with the interests of our investors. In addition, the partial spin-off suffered by Company on June 28, 2013 included the transfer of properties occupied by our units to the company controlled by our controlling shareholder, so historical expenses and costs of the use of these units by the Company may not represent future costs and expenses with the rents of such properties paid to our Controlling Shareholder.

Our shares may be delisted from B3’s Novo Mercado, which may lead to a reduction in the liquidity and the price of our shares.

After concluding or IPO, our shares will be traded on Novo Mercado’s listing segment of BM&FBOVESPA S.A. - Bolsa de Valores, Mercadorias e Futuros ("Novo Mercado" and "B3", respectively). It’s possible that the delisting of our shares in the Novo Mercado occurs for reasons beyond our control. In addition, our controlling shareholder may choose to delist our shares from the Novo Mercado. In the latter case, our delisting from the Novo Mercado must be approved by a shareholders’ meeting, with the votes of most of our shares issued and B3 must be notified in writing at least thirty (30) days in advance.

After a possible delist from Novo Mercado, we will not be able to request the listing of our securities in the Novo Mercado for a period of two years after delisting, unless there is the sale of our control after delisting from Novo Mercado. In addition, delisting our shares from Novo Mercado may change the liquidity and the price of our shares, as well as change the rights of our minority shareholders.

With the exit from Novo Mercado, for our shares to be listed in another of B3’s listing segment, our controlling shareholder must carry out a public offering ("OPA") to our other shareholders. In this case, the price of the shares issued by us must be. at least. the economic price assessed by an appraisal report, the result of which will not depend on our controlling shareholder or our management. The economic price established in the appraisal report will not be subject to revision and the exit from Novo Mercado will not depend on the minimum quorum for acceptance of the OPA by the holders of our shares.

The price and liquidity of our shares may be adversely affected after the OPA, as well as after the exit from the Novo Mercado, which may considerably restrict the ability of the investors to sell the shares at the desired price and at the desired moment.