UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

REPORT OF FOREIGN PRIVATE ISSUER PURSUANT TO RULE 13a-16 OR 15d-16 UNDER THE SECURITIES EXCHANGE ACT OF 1934

 

For the month of August, 2019 

 

Commission File Number: 001-38992

 

Afya Limited

(Exact name of registrant as specified in its charter)

 

Alameda Oscar Niemeyer, No. 119, Sala 504

Vila da Serra, Nova Lima, Minas Gerais

Brazil

+55 (31) 3515 7550

(Address of principal executive office)

 

Indicate by check mark whether the registrant files or will file annual reports under cover of Form 20-F or Form 40-F:

 

Form 20-F

X

  Form 40-F  

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(1):

 

Yes     No

X

 

Indicate by check mark if the registrant is submitting the Form 6-K in paper as permitted by Regulation S-T Rule 101(b)(7):

 

Yes     No

X

 

 

 

 

 

 

TABLE OF CONTENTS

 

EXHIBIT  
99.1 Unaudited Interim Condensed Consolidated Financial Statements as of and for the six months ended June 30, 2019

 

 

 

 

SIGNATURE

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

    Afya Limited  
       
       
      By: /s/ Virgilio Deloy Capobianco Gibbon  
        Name: Virgilio Deloy Capobianco Gibbon  
        Title: Chief Executive Officer  

Date: August 29, 2019

 

 

Exhibit 99.1

 

Afya Participações S.A.

 

 

 

Unaudited interim condensed

consolidated financial statements

 

June 30, 2019

 

 

 

 

 

 

 

Afya Participações S.A.

Unaudited interim condensed consolidated statements of financial position

As of June 30, 2019 and December 31, 2018 

(In thousands of Brazilian reais)

 

  Notes   June 30, 2019   December 31, 2018
Assets     (unaudited)    
Current assets          
Cash and cash equivalents 5   68,471   62,260
Trade receivables 7   125,014   58,445
Inventories     2,812   1,115
Recoverable taxes     5,362   2,265
Derivatives 12.2.1   197   556
Restricted cash 6   12,540   -
Other assets     24,548   8,859
Total current assets     238,944   133,500
           
Non-current assets          
Restricted cash 6   12,984   18,810
Trade receivables 7   9,728   5,235
Related parties 8   3,293   1,598
Derivatives 12.2.1   -   663
Other assets     13,353   10,380
Investment in associate 9   49,835   -
Property and equipment 10   110,065   65,763
Right-of-use assets 2.3   268,121   -
Intangible assets 11   1,226,095   682,469
Total non-current assets     1,693,474   784,918
           
Total assets     1,932,418   918,418
           
Liabilities          
Current liabilities          
Trade payables     19,856   8,104
Loans and financing 12.2.1   61,664   26,800
Lease liabilities 2.3   37,094   -
Accounts payable to selling shareholders 12.2.2   129,847   88,868
Advances from customers     19,644   13,737
Labor and social obligations     53,722   31,973
Taxes payable     17,301   6,468
Income taxes payable     1,671   282
Dividends payable     39,331   4,107
Derivatives 12.2.1   959   -
Other liabilities     7,780   1,993
Total current liabilities     388,869   182,332
           
 Non-current liabilities          
Loans and financing 12.2.1   35,318   51,029
Lease liabilities 2.3   236,489   -
Accounts payable to selling shareholders 12.2.2   172,850   88,862
Taxes payable     21,462   150
Provision for legal proceedings 22   6,810   3,465
Derivatives 12.2.1   548   -
Other liabilities     387   2,226
Total non-current liabilities     473,864   145,732
Total liabilities     862,733   328,064
           
Equity          
Share capital 16   635,830   315,000
Additional paid-in capital     331,424   125,014
Share-based compensation reserve     4,070   2,161
Earnings reserves     26,806   59,807
Retained earnings     23,959   -
Equity attributable to equity holders of the parent     1,022,089   501,982
Non-controlling interests     47,596   88,372
Total equity     1,069,685   590,354
           
Total liabilities and equity     1,932,418   918,418

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

F-2 

 

Afya Participações S.A.

Unaudited interim condensed consolidated statements of income and comprehensive income

For the three- and six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian reais, except earnings per share)

 

      Three-month period ended   Six-month period ended
  Notes   June 30, 2019   June 30, 2018   June 30, 2019   June 30, 2018
      (unaudited)   (unaudited)   (unaudited)   (unaudited)
                   
Net revenue 18   178,493   75,235   323,071   136,555
Cost of services 19   (82,283)   (38,680)   (136,647)   (66,875)
Gross profit     96,210   36,555   186,424   69,680
                   
General and administrative expenses 19   (59,584)   (14,583)   (90,818)   (28,846)
Other income (expenses), net     576   502   370   1,254
                   
Operating income     37,202   22,474   95,976   42,088
                   
Finance income 20   4,650   1,936   9,817   3,624
Finance expenses 20   (19,721)   (1,552)   (31,957)   (2,603)
Finance result     (15,071)   384   (22,140)   1,021
                   
Share of income of associate 9   920   -   920   -
                   
Income before income taxes     23,051   22,858   74,756   43,109
                   
Income taxes expense 21   (1,725)   (267)   (3,954)   (1,661)
                   
Net income   96 21,326   22,591   70,802   41,448
                   
 Other comprehensive income     -   -   -   -
Total comprehensive income     21,326   22,591   70,802   41,448
                   
Income attributable to                  
Equity holders of the parent     16,317   20,462   57,852   37,974
Non-controlling interests     5,009   2,129   12,950   3,474
      21,326   22,591   70,802   41,448
Basic earnings per share                  
Per common share (*) 17   6.56   16.52   25.41   31.79

Diluted earnings per share

Per common share (*) 

17   6.44   16.23   24.91   31.23

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

F-3 

 

Afya Participações S.A.

Unaudited interim condensed consolidated statements of changes in equity

For the six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian reais)

 

    Equity attributable to equity holders of the parent    
          Earnings reserves        
   

Share capital

 

Additional paid-in capital Share-based compensation reserve Legal reserve Retained earnings reserve Retained earnings Total Non-controlling interests Total equity
                     
Balances at December 31, 2017   66,485 (63,588) - 2,905 40,309 - 46,111 651 46,762
Net income for the period   - - - - - 37,974 37,974 3,474 41,448
Total comprehensive income   - - - - - 37,974 37,974 3,474 41,448
                     
Capital increase with cash   55,000 - -  -  - 55,000 - 55,000
Capital increase with corporate reorganization   11,670 188,602 - - - - 200,272   200,272
Non controlling interest arising on business combination   - - - - - - - 40,411 40,411
Share-based compensation   - - 911 - - - 911   911
Balances at June 30, 2018 (unaudited)   133,155 125,014 911 2,905 40,309 37,974 340,268 44,536 384,804
                     
Balances at December 31, 2018   315,000 125,014 2,161 7,223 52,584 - 501,982 88,372 590,354
Net income for the period   - - - - - 57,852 57,852 12,950 70,802
Total comprehensive income   - - - - - 57,852 57,852 12,950 70,802
                     
Capital increase with cash   150,000 - - - - - 150,000 - 150,000
Capital increase from the corporate reorganization   122,062 137,051 - - - - 259,113 - 259,113
Capital increase from shares contribution of shareholders  

48,768

36,358

-

-

-

-

85,126

(44,774)

40,352

Share-based compensation   - - 1,909 - - - 1,909 - 1,909
Dividends cancelled   - - - - - 4,107 4,107 - 4,107
Dividends declared to shareholders   - - - - - (38,000) (38,000) (8,952) (46,952)
Allocation to additional paid-in capital   - 33,001 - - (33,001) - - - -
Balances at June 30, 2019 (unaudited)   635,830 331,424 4,070 7,223 19,583 23,959 1,022,089 47,596 1,069,685

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

F-4 

 

Afya Participações S.A.

Unaudited interim condensed consolidated statements of cash flows 

For the six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian reais)

 

  June 30, 2019   June 30, 2018
  (unaudited)   (unaudited)
Operating activities      
  Income before income taxes 74,756   43,109
    Adjustments to reconcile income before income taxes      
      Depreciation and amortization 28,441   3,405
      Provision/(reversal) of allowance for doubtful accounts 8,606   2,382
      Share-based compensation expense 1,909   911
      Net foreign exchange differences (1,858)   -
      Loss on derivative instruments 2,809   -
      Accrued interest 9,873   158
      Accrued lease interest 14,540   -
      Share of income of associate (920)   -
      Provision for legal proceedings (347)   (1,658)
Changes in assets and liabilities      
  Trade receivables (28,624)   (12,249)
  Inventories 884   (235)
  Recoverable taxes (2,827)   (1,429)
  Other assets (15,758)   (756)
  Trade payables 5,257   (3,434)
  Taxes payables 1,139   1,236
  Advances from customers 1,428   (2,193)
  Labor and social obligations 13,352   8,877
  Other liabilities (1,458)   (2,530)
         
  Income taxes paid (2,392)   (2,183)
  Net cash flows from operating activities 108,810   33,411
             
Investing activities      
  Acquisition of property and equipment (20,674)   (6,010)
  Acquisition of intangibles assets (718)   (641)
  Payments of accounts payable to selling shareholders (30,674)   (10,022)
  Acquisition of subsidiaries, net of cash acquired (148,880)   1,289
  Loans to related parties (1,695)   2,175
  Restricted cash (1,153)   -
  Net cash flows used in investing activities (203,794)   (13,209)
       

Financing activities 

     
  Payments of loans and financing (23,868)   (3,981)
  Payment of lease liabilities (17,316)   -
  Dividends paid (7,621)   -
  Capital increase 150,000   55,000
  Net cash flows from financing activities 101,195   51,019
         
  Net increase in cash and cash equivalents 6,211   71,221
  Cash and cash equivalents at the beginning of the period  62,260   25,490
  Cash and cash equivalents at the end of the period  68,471   96,711

 

The accompanying notes are an integral part of the unaudited interim condensed consolidated financial statements.

 

F-5 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

1Corporate information

 

Afya Participações S.A. and its subsidiaries (collectively, the “Company”) is a wholly owned subsidiary of Afya Limited (“Afya Limited”) a holding company incorporated under the laws of the Cayman Islands on March 22, 2019. Afya Limited became the holding company of Afya Participações S.A. (hereafter referred to as “Afya Brazil”), formerly denominated NRE Participações S.A., through the completion of the corporate reorganization described below.

 

The Company is formed by a network of higher education institutions located in eight Brazilian states forming a large educational group in the country, with emphasis on offering undergraduate and graduate courses related to medicine and health sciences and comprises the development and sale of electronically distributed educational courses on medicine science and related printed and technological educational content.

 

These unaudited interim condensed consolidated financial statements for the three- and six-month periods ended June 30, 2019 were authorized for issue by the Board of Directors on August 29, 2019.

 

Corporate reorganization

 

On March 29, 2019, Afya Brazil merged (i) BR Health Participações S.A. (“BR Health”), a wholly-owned subsidiary of Bozano Educacional II Fundo de Investimento em Participações Multiestratégia (“Crescera”) that controls Guardaya Empreendimentos and Participações S.A. (“Guardaya”) and is one of Afya Brazil’s shareholders; and (ii) Guardaya which owns 100% of Medcel Editora e Eventos S.A. (“Medcel Editora”) and CBB Web Serviços e Transmissões On Line S.A. (“CBB Web”), focused on medical residency preparation courses located in the state of São Paulo, resulting in the transfer to Afya Brazil of 100% of Medcel Editora and CBB Web and 15% of União Educacional do Planalto Central S.A. (“UEPC”), a medical school located in the Federal District.

 

On June 18, 2019 Afya Brazil acquired an additional 15% interest in UEPC resulting in an interest of 30%.

 

Until the contribution of Afya Brazil shares to Afya Limited, Afya Limited did not have commenced operations and had only nominal assets and liabilities and no material contingent liabilities or commitments. Accordingly, Afya Limited’s consolidated financial information will substantially reflect the operations of Afya Brazil after the corporate reorganization.

 

On July 7, 2019, each of the Company´s shareholders had agreed to contribute their respective shares on the Company to Afya Limited, exchanging one common share as 28 Class A or Class B common shares of Afya Limited. The holders of the Class A common shares and Class B common shares have identical rights, except that (i) the holder of Class B common shares is entitled to 10 votes per share, whereas holders of Class A common shares are entitled to one vote per share, (ii) Class B common shares have certain conversion rights and (iii) the holders of Class B common shares are entitled to maintain their proportional ownership interest in the event that common shares and/or preferred shares are proposed to be issued. The holders of Class A common shares and Class B common shares vote together as a single class on all matters (including the election of directors) submitted to a vote of shareholders, unless otherwise required by law and subject to certain exceptions.

 

F-6 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

Initial public offering

 

On July 18, 2019, Afya Limited priced its initial public offering (“IPO”) of 13,744,210 Class A common shares, which began trading on the Nasdaq Global Select Market (“NASDAQ”) on July 19, 2019 under the symbol “AFYA”. On July 23, 2019, the underwriters exercised the option to buy an additional 2,061,631 Class A common shares to cover over-allotments, totaling 15,805,841 Class A common shares, which 13,888,887 Class A common shares were offered by Afya Limited and 1,916,954 Class A common shares were offered by the selling shareholders at the initial public offering price. The initial offering price was US$ 19.00 per Class A common share less US$ 1.14 per share for underwriting discounts, resulting in gross proceeds of US$ 282,292 thousand (or R$ 1,062,011 at the exchange rate of R$ 3.7621 per US$ 1.00 at July 23, 2019).

 

On July 23, 2019, the share capital of Afya Limited was increased by 13,888,887 Class A shares through the net proceeds received as a result of the IPO of US$ 240,222 thousand (or R$ 898,621), after deducting US$ 15,668 thousand (or R$ 58,612) in underwriting discounts and commissions and, approximately, US$ 5,250 thousand (or R$ 19,639) of other offering expenses.

 

At the date of authorization for issue of these unaudited interim condensed consolidated financial statements, Afya Limited has transferred a total amount of US$ 251,800 of the net proceeds from the Cayman Islands to bank accounts in Brazil. These deposits are invested on first-line financial institutions in Brazil and are denominated in Brazilian reais.

 

Acquisitions

 

On April 3, 2019, the Company acquired control of Instituto Educacional Santo Agostinho S.A. (“FASA”), through the acquisition of 90% of the Company´s shares, a post-secondary education institution and offers on-campus undergraduate medicine courses and a variety of other on-campus and distance learning post-secondary undergraduate and graduate education programs.

 

On May 9, 2019, the Company acquired control of Instituto de Pesquisa e Ensino Médico do Estado de Minas Gerais Ltda. (“IPEMED”), through the acquisition of 100% of IPEMED´s shares, a post-secondary education. The acquisition of IPEMED is in line with the Company’s strategy to focus on medical education, including post-graduate medical education.

 

F-7 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

2Significant accounting policies

 

2.1Basis for preparation of the unaudited interim condensed consolidated financial statements

 

The unaudited interim condensed consolidated financial statements as of June 30, 2019 and for the three- and six-month periods ended June 30, 2019 and 2018 have been prepared in accordance with IAS 34 Interim Financial Reporting.

 

The unaudited interim condensed consolidated financial statements have been prepared on a historical cost basis, except for derivative financial instruments that have been measured at fair value.

 

The unaudited interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Company’s annual consolidated financial statements as of December 31, 2018.

 

The unaudited interim condensed consolidated financial statements are presented in Brazilian reais (“BRL” or “R$”), which is the Company’s functional and presentation currency. All amounts are rounded to the nearest thousand, except when otherwise indicated.

 

2.2Basis of consolidation

 

The table below is a list of the Company’s subsidiaries and associates:

 

        Direct and indirect interest
Name Principal activities Location Investment type

June 30,

2019 

December 31, 2018
Instituto Tocantinense Presidente Antônio Carlos Porto S.A. - ITPAC Porto Nacional Undergraduate and graduate degree programs Porto Nacional - TO Subsidiary 100% 100%
Instituto Tocantinense Presidente Antônio Carlos S.A. - ITPAC Araguaina Undergraduate and graduate degree programs Araguaína - TO Subsidiary 100% 100%
União Educacional do Vale do Aço S.A. – UNIVAÇO * Medicine undergraduate degree program Ipatinga – MG Subsidiary 100% 76%
IPTAN - Instituto de Ensino Superior Presidente Trancredo de Almeida Neves S.A. (“IPTAN”) Undergraduate and graduate degree programs São João Del Rei - MG Subsidiary 100% 100%
Instituto de Educação Superior do Vale do Parnaíba S.A. (“IESVAP”) Undergraduate and graduate degree programs Parnaíba – PI Subsidiary 80% 80%
Centro de Ciências em Saúde de Itajubá S.A. (“CCSI”) Medicine undergraduate degree program Itajubá – MG Subsidiary 60% 60%
Instituto de Ensino Superior do Piauí S.A. (”IESP”) * Undergraduate and graduate degree programs Teresina - PI Subsidiary 100% 80%
RD Administração e Participações Ltda. Holding Pato Branco – PR Subsidiary 100% 100%
FADEP - Faculdade Educacional de Pato Branco Ltda. (“FADEP”) Undergraduate and graduate degree programs Pato Branco – PR Subsidiary 100% 100%
CBB Web Serviços e Transmissões Online S.A. (“CBBW”) ** Medical education courses and online platform São Paulo- SP Subsidiary 100% -
Medcel Editora e Eventos S.A. (“Medcel”) ** Medical education content São Paulo- SP Subsidiary 100% -
Instituto Educacional Santo Agostinho S.A. (“FASA”) ** Undergraduate and graduate degree programs Montes Claros - MG Subsidiary 100% -
Instituto de Pesquisa e Ensino Médico do Estado de Minas Gerais Ltda. (“IPEMED”) * Post-graduate Belo Horizonte - MG Subsidiary 100% -
União Educacional do Planalto Central S.A. (“UEPC”) *** Undergraduate and graduate degree programs Brasília - DF Associate 30% -

* Refer to Note 16 for further details on the acquisition of minority interest occurred during 2019.

** Refer to Note 4 for further details on the business combinations occurred during 2019.

*** Refer to Note 9 for further details on the associate.

 

F-8 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

The financial information of the acquired subsidiaries is included in the Company’s unaudited interim condensed consolidated financial statements beginning on the respective acquisition dates.

 

2.3Changes in accounting policies and disclosures

 

New standards, interpretations and amendments adopted by the Company

 

The accounting policies adopted in the preparation of the unaudited interim condensed consolidated financial statements are consistent with those followed in the preparation of the Company’s consolidated financial statements for the year ended December 31, 2018, except for the adoption of new standards effective as of January 1, 2019, and for the recognition of revenue from contracts with customers in Business Unit 2, once the majority of revenues is derived from printed books and e-books, which are recognized at the point in time when control is transferred to the customer, whilst the Business Unit 1 revenue recognition method is mostly over time. The Company has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective.

 

The Company applied, for the first time on January 1, 2019, IFRS 16 Leases. The nature and effect of these changes are disclosed below.

 

Other amendments and interpretations were applied for the first time in 2019, but did not have a significant impact on the unaudited interim condensed consolidated financial statements of the Company.

 

F-9 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

a)IFRS 16 - Leases

 

IFRS 16 supersedes IAS 17 Leases, IFRIC 4 Determining whether an Arrangement contains a Lease, SIC-15 Operating Leases-Incentives and SIC-27 Evaluating the Substance of Transactions Involving the Legal Form of a Lease. The standard sets out the principles for the recognition, measurement, presentation and disclosure of leases and requires lessees to account for all leases under a single on-balance sheet model.

 

The Company adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of January 1, 2019. Under this method, the standard is applied retrospectively with the cumulative effect of initially applying the standard recognized at the date of initial application. The Company elected to use the transition practical expedient allowing the standard to be applied only to contracts that were previously identified as leases applying IAS 17 and IFRIC 4 at the date of initial application. The Company also elected to use the recognition exemptions for lease contracts that, at the commencement date, have a lease term of 12 months or less and do not contain a purchase option (‘short-term leases’), and lease contracts for which the underlying asset is of low value (‘low-value assets’).

 

The effect of adoption of IFRS 16 as at January 1, 2019 is as follows:

 

Assets  
 Right-of-use assets R$ 212,360
   
Liabilities  
 Lease liabilities R$ 212,360

 

i)Nature of the effect of adoption of IFRS16

 

The Company has lease contracts for properties. Before the adoption of IFRS 16, the Company classified each of its leases (as lessee) at the inception date as either a finance lease or an operating lease. The Company did not have finance leases as of December 31, 2018. In an operating lease, the leased property was not capitalized and the lease payments were recognized as rent expense in profit or loss on a straight-line basis over the lease term. Upon adoption of IFRS 16, the Company applied a single recognition and measurement approach for all leases, except for short-term leases and leases of low-value assets. The standard provides specific transition requirements and practical expedients, which has been applied by the Company.

 

The Company recognized right-of-use assets and lease liabilities for those leases previously classified as operating leases, except for short-term leases and leases of low-value assets. The right-of-use assets for the leases were recognized based on the amount equal to the lease liabilities, adjusted for any related prepaid and accrued lease payments previously recognized. Lease liabilities were recognized based on the present value of the remaining lease payments, discounted using the incremental borrowing rate at the date of initial application.

 

F-10 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

The Company also applied the available practical expedients wherein it:

 

·Used an incremental borrowing rate, according to the characteristics for each lease;

·Relied on its assessment of whether leases are onerous immediately before the date of initial application;

·Applied the short-term leases exemptions to leases with lease term that ends within 12 months at the date of initial application;

·Excluded the initial direct costs from the measurement of the right-of-use asset at the date of initial application;

·Used hindsight in determining the lease term where the contract contains options to extend or terminate the lease.

 

The lease liabilities as at January 1, 2019 can be reconciled to the operating lease commitments as of December 31, 2018 as follows:

 

Operating lease commitments as at December 31, 2018 520,795
Weighted average incremental borrowing rate as at January 1, 2019 11.63%
Discounted operating lease commitments at 1 January 2019 212,530
Less:  
Commitments relating to leases of short-term and low-value assets (170)
Lease liabilities as at January 1, 2019 212,360

 

ii)Summary of new accounting policies

 

Set out below are the new accounting policies of the Company upon adoption of IFRS 16, which have been applied from the date of initial application:

 

Right-of-use assets

 

The Company recognizes right-of-use assets at the commencement date of the lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease incentives received. Unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term. Right-of use assets are subject to impairment.

 

F-11 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

Lease liabilities

 

At the commencement date of the lease, the Company recognizes lease liabilities measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company exercising the option to terminate. The variable lease payments that do not depend on an index or a rate are recognized as expense in the period on which the event or condition that triggers the payment occurs.

 

In calculating the present value of lease payments, the Company uses the incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.

 

Short-term leases and leases of low-value assets

 

The Company applies the short-term lease recognition exemption to its short-term leases of properties (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase option). It also applies the lease of low-value assets recognition exemption to leases that are considered of low value. Lease payments on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.

 

Significant judgement in determining the lease term of contracts with renewal options

 

The Company determines the lease term as the non-cancellable term of the lease, together with any periods covered by an option to extend the lease if it is reasonably certain to be exercised, or any periods covered by an option to terminate the lease, if it is reasonably certain not to be exercised.

 

The Company has the option, under some of its lease agreements to lease the assets for additional terms. The Company applies judgement in evaluating whether it is reasonably certain to exercise the option to renew. That is, it considers all relevant factors that create an economic incentive for it to exercise the renewal. After the commencement date, the Company reassesses the lease term if there is a significant event or change in circumstances that is within its control and affects its ability to exercise (or not to exercise) the option to renew (e.g., a change in business strategy).

 

F-12 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

iii)Amounts recognized in the statement of financial position and income

 

Set out below, are the carrying amounts of the Company’s right-of-use assets and lease liabilities and the movements during the period:

 

  Right-of-use assets   Lease
liabilities
As at January 1, 2019 (unaudited) 212,360   212,360
Additions 2,634   2,634
Business combinations 61,145   61,365
Depreciation expense (8,018)   -
Interest expense -   14,540
Payment of lease liabilities -   (17,316)
As at June 30, 2019 (unaudited) 268,121   273,583
Current -   37,094
Non-current 268,121   236,489

 

The Company recognized rent expense from short-term leases and low-value assets of R$ 733 for the six-month period ended June 30, 2019.

 

b)IFRIC Interpretation 23 - Uncertainty over Income Tax Treatment

 

The Interpretation addresses the accounting for income taxes when tax treatments involve uncertainty that affects the application of IAS 12 Income Taxes. It does not apply to taxes or levies outside the scope of IAS 12, nor does it specifically include requirements relating to interest and penalties associated with uncertain tax treatments. The Interpretation specifically addresses the following:

 

Whether an entity considers uncertain tax treatments separately

The assumptions an entity makes about the examination of tax treatments by taxation authorities

How an entity determines taxable profit (tax loss), tax bases, unused tax losses, unused tax credits and tax rates

How an entity considers changes in facts and circumstances

 

An entity has to determine whether to consider each uncertain tax treatment separately or together with one or more other uncertain tax treatments. The approach that better predicts the resolution of the uncertainty needs to be followed.

 

The Company applied the interpretation and did not have significant impact on the unaudited interim condensed consolidated financial statements.

 

F-13 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

3Segment Information

 

As a result of the corporate reorganization described in Note 1 which occurred on March 29, 2019, the Company has two reportable segments, as follows:

 

• Education Services Segment (Business Unit 1), which provides educational services through undergraduate and graduate courses related to medicine, other health sciences and other undergraduate programs; and

 

• Residency Preparatory and Specialization Programs Segment (Business Unit 2), which provides residency preparatory courses and medical post-graduate specialization programs, delivering printed and digital content, an online medical education platform and practical medical training.

 

No operating segments have been aggregated to form the above reportable operating segments. There is only one geographic region and the results are monitored and evaluated as a single business.

 

Segment information is presented consistently with the internal reports provided to the Company’s Chief Executive Officer (CEO), which is the Chief Operating Decision Maker (CODM) and is responsible for allocating resources, assessing the performance of the Company’s operating segments, and making the Company’s strategic decisions.

 

The following table presents assets and liabilities information for the Company’s operating segments as of June 30, 2019:

 

 

Business

Unit 1 (unaudited)

Business

Unit 2 (unaudited)

Total

(unaudited)

Elimination (inter-segment transactions)

Consolidated

(unaudited)

Assets  1,546,523  387,713 1,934,236 (1,818) 1,932,418
Current assets 190,266 50,496  240,762  (1,818) 238,944
Non-current assets  1,356,257  337,217 1,693,474 - 1,693,474
Liabilities and equity  1,546,523  387,713 1,934,236 (1,818) 1,932,418
Current liabilities 371,446  19,241 390,687 (1,818) 388,869
Non-current liabilities 441,979  31,885 473,864 - 473,864
Equity 733,098  336,587  1,069,685 - 1,069,685
Other disclosures          
Investment in associate 49,835  -    49,835    49,835 
Capital expenditures (*) 21,392   -    21,392    21,392 

(*) Capital expenditures consider the acquisitions of property and equipment and intangible assets.

 

F-14 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

The following table presents statements of income for the Company’s operating segments for the six-month period ended June 30, 2019:

  

 

Business

Unit 1

(Unaudited)

Business

Unit 2

(Unaudited)

Total

(Unaudited)

Elimination (inter-segment transactions) Consolidated (Unaudited)
Net revenue          
External customer 301,518 21,553 323,071 - 323,071
Inter-segment - 1,818 1,818 (1,818) -
Net revenue 301,518 23,371 324,889 (1,818) 323,071
Costs of services (132,201) (8,082) (140,283) 1,818 (138,465)
Gross profit 169,317 15,289 184,606 - 184,606
General and administrative expenses         (89,000)
Other income (expenses), net         370
Operating profit         95,976
Finance income         9,817
Finance costs         (31,957)
Share of income of associate         920
Income before income taxes         74,756
Income taxes expense         (3,954)
Net income for the period         70,802
             

 

There were no revenues derived from the Business Unit 2 for three-month period ended March 31, 2019 and the three- and six-month periods ended June 30, 2018, given such segment has commenced following the business combinations occurred in 2019, being the first one on March 29, 2019.

 

Seasonality of operations

 

Business Unit 1´s tuition revenues do not have significant fluctuations during the year.

 

Business Unit 2’s sales are concentrated in the first and last quarter of the year, as a result of enrollments at the beginning of the year. The majority of Business Unit 2’s revenues is derived from printed books and e-books, which are recognized at the point in time when control is transferred to the customer. Consequently, Business Unit 2 generally has higher revenues and results of operations in the first and last quarter of the year compared to the second and third quarters of the year.

 

F-15 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

4Business combinations

 

The preliminary fair values of the identifiable assets acquired and liabilities assumed as at the acquisition date were:

 

  Fair value as of acquisition date in 2019
  Guardaya FASA IPEMED
Assets      
Cash and cash and equivalents 1,548 3,834 307
Trade receivables 44,277 1,832 8,965
Inventories 2,581 - -
Other assets 769 178 1,946
Derivatives - 280 -
Restricted cash - 5,561 -
Right-of-use assets 4,556 47,789 8,800
Investment in associate 24,458 - -
Property and equipment 1,594 22,946 3,676
Intangible assets 59,977 171,511 33,039
  139,760 253,931 56,733
Liabilities      
Trade payables (454) (1,133) (4,908)
Loans and financing (4,076) (35,419)  (3,592)
Lease liabilities (4,607) (47,793) (8,965)
Labor and social obligations (1,844) (5,254)  (1,575)
Taxes payable (3,571) (483)  (26,503)
Advances from customers (680) (3,192) (607)
Provision for legal proceedings - (1,684) (2,008)
Other liabilities (4,709) (460) -
  (19,941) (95,418) (48,158)
Total identifiable net assets at fair value 119,819 158,513 8,575
Goodwill arising on acquisition 139,294 61,925 88,967
Non-controlling interest - (15,851) -
Purchase consideration transferred 259,113 204,587 97,542
Cash paid - 102,330 52,239
Capital contribution 259,113 - -
Payable in installments - 102,257 45,303
Analysis of cash flows on acquisition:      
Transaction costs (included in cash flows from operating activities) (482) (1,887) (180)

Cash paid, net of cash acquiredwith the subsidiary (included in cash flows from investing activities)  

1,548 (98,496) (51,932)
Net of cash flow on acquisition 1,066 (100,383) (52,112)

F-16 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

a)Acquisition of Guardaya

 

In connection with the corporate reorganization, on March 29, 2019, Afya Brazil merged (i) BR Health, a wholly-owned subsidiary of Crescera that controls Guardaya and is one of Afya Brazil’s shareholders; and (ii) Guardaya which owns 100% of Medcel Editora and CBB Web, resulting in the transfer to Afya Brazil of 100% of Medcel Editora and CBB Web shares. In connection with the transaction 15% of UEPC´s shares were acquired. The Company issued 378,696 common shares as a consideration for the interest in BR Health and Guardaya. The fair value of the consideration given was R$ 259,113.

 

Transaction costs to date amount to R$ 482 and were expensed and are included in general and administrative expenses in the consolidated statement of income.

 

The goodwill recognized is primarily attributed to the expected synergies and other benefits arising from the transaction. The goodwill is not expected to be deductible for income tax purposes.

 

At the acquisition date, the fair value of the trade receivables acquired equals its carrying amount. The Company measured the acquired lease liabilities using the present value of the remaining lease payments at the date of acquisition. The right-of-use assets were measured at an amount equal to the lease liabilities and adjusted to reflect the unfavorable terms of the lease relative to market terms.

 

The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:

 

Intangible assets acquired Valuation technique
Trademark

Relief-from-royalty

This methodology is based on the market remuneration of the use license granted to third parties. The value of the asset is restated by the savings of royalties that the owner would have to own the asset. It is necessary to determine a royalty rate that reflects the appropriate remuneration of the asset. The royalty payments, net of taxes, are discounted to present value.

Customer relationships

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

Educational content

Replacement cost

This methodology is based on the estimate of the cost of replacing the asset with a new one (acquisition or reconstruction), adjusted to reflect the losses of value resulting from the physical deterioration and the economic functional obsolescence of the asset. 

 

From the date of acquisition, this business combination has contributed R$ 10,236 of revenue and R$ 2,019 as loss before income taxes to the Company. If the acquisition had taken place at the beginning of the period, net revenue would have been increased by R$ 34,684 and income before income taxes for the period would have been increased by R$ 16,138.

 

F-17 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

b)Acquisition of FASA

 

On April 3, 2019, Afya Brazil acquired control of FASA, through the acquisition of 90% of the Company’s shares. The purchase price of R$ 204,587 is comprised by:

 

i) R$ 102,330 paid in cash on the acquisition date; ii) R$ 40,881 payable in April 2020; iii) R$ 30,688 payable in April 2021; and iv) R$ 30,688 payable in April 2022, adjusted by the IPCA rate + 4.1% per year. Afya Brazil accounted for this acquisition as a business combination.

 

Transaction costs to date amount to R$ 1,887 and were expensed and are included in general and administrative expenses in the consolidated statement of income.

 

The acquisition was completed recently and the valuation of property and equipment will be finalized at a later date, and the final allocation of the purchase price is dependent on a number of factors, including the final evaluation of the fair values of tangible and intangible assets acquired and liabilities assumed as of the closing date of the transaction.

 

At the acquisition date, the fair value of the trade receivables acquired equals its carrying amount. The Company measured the acquired lease liabilities using the present value of the remaining lease payments at the date of acquisition. The right-of-use assets were measured at an amount equal to the lease liabilities and adjusted to reflect the unfavorable terms of the lease relative to market terms.

 

The goodwill recognized includes the value of expected synergies arising from the acquisition, which is not separately recognized. None of the goodwill recognized is expected to be deductible for income taxes purposes.

 

The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:

 

Intangible assets acquired Valuation technique
Licenses

With-and-without method

The with-and-without method consists of estimating the fair value of an asset by the difference between the value of this asset in two scenarios: a scenario considering the existence of the asset in question and another considering its non-existence. 

Customer

relationships

 

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets. 

 

From the date of acquisition, FASA has contributed R$ 22,085 of revenue and R$ 3,616 to the income before income taxes to the Company. If the acquisition had taken place at the beginning of the period, net revenue would have been increased by R$ 20,067 and income before income taxes for the period would have been increased by R$ 1,177.

 

F-18 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

c)Acquisition of IPEMED

 

On May 9, 2019, Afya Brazil acquired control of IPEMED, through the acquisition of 100% of the Company’s shares. IPEMED is a post-secondary education institution with campuses located in the states of Bahia, Minas Gerais, Rio de Janeiro, São Paulo and in the Distrito Federal. It focuses on medical graduate programs. The purchase price was R$ 97,542, being: i) R$ 25,000 paid in cash as advance through April 2019; ii) R$ 27,239 paid in cash on the acquisition date;; iii) R$45.303 payable in five annual installments due from February 2020 to February 2024 adjusted by the Interbank Certificates of Deposit (“CDI”) rate.

 

Transaction costs to date amount to R$ 180 and were expensed and are included in general and administrative expenses in the consolidated statement of income.

 

The acquisition was completed recently and the valuation of property and equipment will be finalized at a later date, and the final allocation of the purchase price is dependent on a number of factors, including the final evaluation of the fair values of tangible and intangible assets acquired and liabilities assumed as of the closing date of the transaction.

 

At the acquisition date, the fair value of the trade receivables acquired equals its carrying amount. The Company measured the acquired lease liabilities using the present value of the remaining lease payments at the date of acquisition. The right-of-use assets were measured at an amount equal to the lease liabilities and adjusted to reflect the unfavorable terms of the lease relative to market terms.

 

The goodwill recognized includes the value of expected synergies arising from the acquisition, which is not separately recognized. None of the goodwill recognized is expected to be deductible for income taxes purposes.

 

The valuation techniques used for measuring the fair value of separately identified intangible assets acquired were as follows:

 

Intangible assets acquired Valuation technique
Trademark

Relief-from-royalty

This methodology is based on the market remuneration of the use license granted to third parties. The value of the asset is restated by the savings of royalties that the owner would have to own the asset. And it is necessary to determine a royalty rate that reflects the appropriate remuneration of the asset. The royalty payments, net of taxes, are discounted to present value.

Customer

relationships 

Multi-period excess earning method

The method considers the present value of net cash flows expected to be generated by customer relationship, by excluding any cash flows related to contributory assets.

 

From the date of acquisition, IPEMED has contributed R$ 10,498 of revenue and R$ 2,197 to the income before income taxes to the Company. If the acquisition had taken place at the beginning of the period, net revenue would have been increased by R$ 24,350 and income before income taxes for the period would have been decreased by R$ 4,567.

 

F-19 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

5Cash and cash equivalents

 

  June 30, 2019   December 31, 2018
  (unaudited)    
       
Cash and bank deposits 13,594   4,560
Cash equivalents 54,877   57,700
  68,471   62,260

 

Cash equivalents correspond to financial investments in Bank Certificates of Deposit (“CDB”) with highly rated financial institutions. As of June 30, 2019, the average interest on these CDB are equivalent to 99.2% of the Interbank Certificates of Deposit (“CDI”) (December 31, 2018: 99.28%). These funds are available for immediate use and have insignificant risk of changes in value.

 

6Restricted cash

 

  June 30, 2019   December 31, 2018
- (unaudited)    
Collateral for loans with Banco Itaú (a) 20,772   18,810
Collateral for loan with Banco Santander 2,003   -
Other 2,749   -
  25,524   18,810
Current 12,540   -
Non-current 12,984   18,810

 

(a)Mainly related to collateral for loan agreement in Euros with at the amount of R$ 18,810.

 

As of June 30, 2019, the restricted cash of R$ 25,524 (December 31, 2018: R$ 18,810) corresponds to financial investments in investment funds managed by highly rated financial institutions that serve as collateral for loans agreements. In accordance with the contractual terms, the Company is not allowed to withdraw any amounts until an integral payment of the loan. As mentioned in Note 24, the Company settled certain loan agreements.

 

As of June 30, 2019, the average interest on these funds are equivalent to 99.43% (December 31, 2018: 98.22%) of the CDI. Interest income related to these investments are not restricted and are classified as cash and cash equivalents.

 

F-20 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

7Trade receivables

 

  June 30, 2019   December 31, 2018
  (unaudited)    
       
Tuition fees 84,868   57,548
Proeducar 1,883   1,882
FIES 17,632   4,576
Educational content (a) 39,293   -
Others 4,711   7,211
  148,387   71,217
(-) Allowance for doubtful accounts (13,645)   (7,537)
  134,742   63,680
Current 125,014   58,445
Non-current 9,728   5,235

 

(a)Related to trade receivables from sales of printed books, e-books and medical courses through digital platform from Medcel Editora and CBB Web.

 

As of June 30, 2019 and December 31, 2018, the aging of trade receivables was as follows:

 

  June 30, 2019   December 31, 2018
  (unaudited)    
       
Neither past due nor impaired 67,774   18,194
Past due      
1 to 30 days 19,146   14,433
31 to 90 days 26,388   18,413
91 to 180 days 23,861   15,394
More than 180 days 11,218   4,783
  148,387   71,217

 

The movement in the allowance for doubtful accounts for the six-month periods ended June 30, 2019 and 2018, was as follows:

 

  June 30, 2019   June 30, 2018
  (unaudited)   (unaudited)
       
Balance at the beginning of the period (7,537)   (3,794)
Additions (8,606)   (2,382)
Write-offs 2,498   -
Balance at the end of the period (13,645)   (6,176)

F-21 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

8Related parties

 

The table below summarizes the balances and transactions with related parties:

 

  June 30, 2019   December 31, 2018
  (unaudited)    
Assets      
Trade receivables (a) 683   -
Credits with shareholders (b) 3,293   1,598
  3,976   1,598
Current 683   -
Non-current 3,293   1,598
       
  June 30, 2019   June 30, 2018
  (unaudited)   (unaudited)
Other income      
IESVAP (c) -   251
IPTAN (c) -   881
UEPC (a) 683   -
  683   1,132
Lease payments      
RVL Esteves Gestão Imobiliária S.A. 5,888   6,313
UNIVAÇO Patrimonial Ltda. 1,364   1,316
IESVAP Patrimonial Ltda. 1,191   265
  8,443   7,894

 

(a)Refers to sales of educational content from Medcel to UEPC.

(b)Amounts to be reimbursed by the shareholders to Afya Brazil mainly related to payments of legal cost and advisory services.

(c)Refers to share services and corporate expenses provided by Afya Brazil to IPTAN and IESVAP for the periods prior to their acquisition on April 26, 2018.

 

Key management personnel compensation

 

Key management personnel compensation comprised the following:

 

  June 30, 2019   June 30, 2018
  (unaudited)   (unaudited)
Short-term employee benefits 1,289   1,205
Share-based compensation plan 1,372   911
  2,661   2,116

 

Compensation of the Company’s key management includes short-term employee benefits comprised by salaries, labor and social charges, and other ordinary short-term employee benefits. The amounts disclosed in the table are the amounts recognized as an expense in general and administrative expenses during the reporting period related to key management personnel. The executive officers participate in the Afya Brazil’s share-based compensation plan (see Note 15(b)).

 

F-22 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

9Investment in associate

 

In connection with the corporate reorganization, described in Note 1 regarding the acquisition of interest in Guardaya, the Company acquired a 30% interest in UEPC, a medical school located in the Federal District, that offers higher education and post-graduate courses, both in person and long-distance learning. The Company’s interest in UEPC is accounted for using the equity method. The following table illustrates the summarized financial information of the Company’s investment in UEPC:

 

    June 30, 2019
    (unaudited)
     
Current assets   30,806
Non-current assets   17,199
Current liabilities   (16,402)
Non-current liabilities   (9,430)
Equity   22,173
Company’s share in equity – 30%   6,652
Goodwill   43,183
Carrying amount of the investment   49,835
     
Net revenue   28,924
Cost of services   (14,337)
General and administrative expenses   (8,713)
Finance result   182
Income before income taxes   6,056
Income taxes expenses   (390)
Net income for the period (March 29 to June 30, 2019)   5,666
Company’s share of profit from March 29 to June 18, 2019 (15%)   780
Company’s share of profit from June 19 to June 30, 2019 (30%)   140
Company’s share of profit for the period (March 29 to June 30, 2019)   920

 

    June 30, 2019
Opening balance   -
Acquisition of minority interest (15%) in March 2019   24,457
Acquisition of additional minority interest (15%) in June 2019   24,458
Share of profit from March 29 to June 30, 2019   920
Closing balance   49,835

F-23 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

10Property and equipment

 

Cost Machinery and equipment Land Vehicles Furniture and fixtures IT equipment Library books Laboratories and clinics Leasehold improvements Construction in progress Total
As of December 31, 2017 20,135 - 120 8,357 6,494 10,016 - 1,187 7,094 53,403
Additions 799 2,770   447 376 406 - - 1,212 6,010
Business combinations 2,428 - 32 1,216 860 929 - 49 2,465 7,979
As of June 30, 2018 (unaudited) 23,362 2,770 152 10,020 7,730 11,351 - 1,236 10,771 67,392
                     
As of December 31, 2018 30,503 2,770 182 11,897 10,243 12,838 597 11,882 10,736  91,648
Additions 3,448 515   2,573 849 369 15 1,362 11,543 20,674
Business combinations 3,988 - 103 2,565 2,035 4,096 418 14,541 470 28,216
As of June 30, 2019 (unaudited) 37,939 3,285 285 17,035 13,127 17,303 1,030 27,785 22,749 140,538
                     
Depreciation                    
As of December 31, 2017 (7,810) - (49) (3,449) (3,472) (6,012) - (136) - (20,928)
Depreciation (859) - (14) (360) (455) (447) - (150) - (2,285)
As of June 30, 2018 (unaudited) (8,669) - (63) (3,809) (3,927) (6,459) - (286) - (23,213)
                     
As of December 31, 2018 (9,696) - (59) (4,261) (4,489) (7,015) (27) (338) - (25,885)
Depreciation (1,466) -   (802) (960) (751) (93) (516) - (4,588)
As of June 30, 2019 (unaudited) (11,162) - (59) (5,063) (5,449) (7,766) (120) (854) - (30,473)
                     
Net book value                    
As of December 31, 2018 20,807 2,770 123 7,636 5,754 5,823 570 11,544 10,736 65,763
As of June 30, 2019 (unaudited) 26,777 3,285 226 11,972 7,678 9,537 910 26,931 22,749 110,065

 

There were no indications of impairment of property and equipment as of and for the six-month periods ended June 30, 2019 and 2018.

 

F-24 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

11Intangible assets and goodwill

 

  Goodwill Licenses with indefinite useful life Trademark Customer relationships Software Education Content Educational platform and software in progress Total
                 
 Cost                
As of December 31, 2017 - - - - 6,633 - - 6,633
Additions - - - - 641 - - 641
Business combinations 50,066 195,261 - 18,311 407 - - 264,045
As of June 30, 2018 (unaudited) 50,066 195,261 - 18,311 7,681 - - 271,319
                 
As of December 31, 2018 169,535 445,616 - 63,303 8,288 - 1,752 688,494
Additions (i) 4,030 - - - 170 - 548 4,748
Business combinations 290,186       150,156 32,111 62,110 - 17,305 2,845 554,713
As of June 30, 2019 (unaudited) 463,751 595,772 32,111 125,413 8,458 17,305 5,145 1,247,955
                 
Amortization                
As of  December 31, 2017 - - - - (1,904) - - (1,904)
Amortization - - - (527) (593) - - (1,120)
As of June 30, 2018 (unaudited) - - - (527) (2,497) - - (3,024)
                 
As of December 31, 2018 - - - (2,945) (3,080) - - (6,025)
Amortization - - (209) (11,987) (702) (2,165) (772) (15,835)
As of June 30, 2019 (unaudited) - - (209) (14,932) (3,782) (2,165) (772) (21,860)
                 
Net book value                
As of December 31, 2018 169,535 445,616 - 60,358 5,208 - 1,752 682,469
As of June 30, 2019 (unaudited) 463,751 595,772 31,902 110,481 4,676 15,140 4,373 1,226,095

(i) The amount of R$4,030 added to goodwil in June 2019 relates to ajustments during the measurement period of the business combination of IESP in respect to amounts to be included as part of the purchase price allocation at acquisition date mainly related to impairment of receivables.

 

Impairment testing of goodwill and intangible assets with indefinite lives

 

The Company performs its annual impairment test in December and when circumstances indicated that the carrying value may be impaired. The Company’s impairment test for goodwill and intangible assets with indefinite lives is based on value-in-use calculations. The key assumptions used to determine the recoverable amount for the different cash generating units were disclosed in the annual consolidated financial statements for the year ended December 31, 2018.

 

There were no indications of impairment of goodwill and intangible assets with indefinite lives for the six-month period ended June 30, 2019.

 

Other intangible assets

 

For the six-month period ended June 30, 2019, there were no indicatives that the Company’s intangible assets with finite useful lives might be impaired.

 

F-25 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

12Financial assets and financial liabilities

 

12.1Financial assets

 

Financial assets   June 30, 2019   December 31, 2018
    (unaudited)    
At amortized cost        
Cash and cash equivalents   68,471   62,260
Trade receivables   134,742   63,680
Restricted cash   25,524   18,810
Related parties   3,293   1,598
Total   232,030   146,348
Current   206,025   120,705
Non-current   26,005   25,643
         
Derivatives not designated as hedging instruments        
Cross-currency interest rate swaps   197   1,219
Total   197   1,219
Current   197   556
Non-current   -   663

 

12.2Financial liabilities

 

Financial liabilities   June 30, 2019   December 31, 2018
    (unaudited)    
At amortized cost        
Trade payables   19,856   8,104
Loans and financing   96,982   77,829
Lease liabilities   273,583   -
Accounts payable to selling shareholders   302,697   177,730
Advances from customers   19,644   13,737
Total   712,762   277,400
Current   268,105   137,509
Non-current   444,657   139,891
         
Derivatives not designated as hedging instruments        
Cross-currency interest rate swaps   1,507   -
Total   1,507   -
Current   959   -
Non-current   548   -

F-26 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

12.2.1Loans and financing

 

Financial institution Currency Interest rate Maturity

June 30, 2019

(unaudited)

December 31,

2018

           
Itaú Unibanco S.A. Euro 1.01% p.y. 2020 77,064 77,829
Itaú Unibanco S.A. Brazilian real 1.48% p.m. 2020 1,862 -
Itaú Unibanco S.A. Brazilian real 1.22% ~ 1.26% p.m. 2019 725 -
Bradesco S.A. U.S. dollar 0.017% p.m. 2019 4,723 -
Itaú Unibanco S.A. Brazilian real 1.1% p.m. 2021 2,917 -
Itaú Unibanco S.A. Brazilian real 1.05% p.m. 2022 4,225 -
Santander S.A. Brazilian real 0.50% p.m. + 100% CDI 2019 528 -
Santander S.A. Brazilian real 0.78% p.m. + 100% CDI 2024 4,403 -
Santander S.A. Brazilian real 2.08% p.m. 2020 444 -
Sicoob Brazilian real 1.03% p.m. 2021 91 -
        96,982 77,829
Current       61,664 26,800
Non-current       35,318 51,029

 

On November 16, 2018, Afya Brazil entered into a euro-denominated loan agreement with Itaú Unibanco S.A. in the amount of R$ 74,986 (equivalent to €17,500). The loan accrues interest at 1.01% per annum and is repayable in three equal installments on November 18, 2019, May 18, 2020 and November 12, 2020. The loan agreement contains a financial covenant requiring Afya Brazil to maintain a Net Debt to EBITDA ratio less or equal to: 2.2x at end of 2018 and 2019 and 1.8x at the end of 2020. The Company is in compliance with the financial ratio at June 30, 2019.

 

On November 21, 2018, Afya Brazil entered into cross-currency interest rate swaps in order to mitigate the foreign exchange exposure related to a loan denominated in Euros. The swap agreements are comprised of derivative assets to swap the foreign exchange exposure (Euros to Brazilian reais) and derivative liabilities for the interest rate swap (1.01% p.a. to 128% of CDI). The swap agreements have three maturities on November 18, 2019, May 18, 2020 and November 12, 2020. The table below summarizes the notional and fair value amounts of the swap agreements as of June 30, 2019.

 

Cross-currency interest rate swap agreements Principal amount (notional) Fair value
     
Asset position: Euros + 1.01% p.y. 74,986 78,212
Liability position: 128% of CDI (74,986) (79,719)
Net position (liabilities)   (1,507)
Current liabilities   (959)
Non-current liabilities   (548)

 

This loan is guaranteed by financial investments in the amount of R$ 18,810, as disclosed in Note 6.

 

F-27 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

In the six-month period ended June 30, 2019, the Company received a loan agreement made on January 4, 2019 with Banco Bradesco S.A. denominated in U.S. dollars in the amount of US$ 1,325 thousand (R$ 4,573) through the acquisition of FASA.

 

In order to mitigate the foreign currency exposure related to the loan with Banco Bradesco S.A. denominated in U.S. dollars, the Company entered into a cross-currency interest rate swap agreements with Banco Bradesco S.A.. The swap agreements are comprised of derivative assets to swap the foreign exchange rate exposure (U.S. dollars to Brazilian reais) and derivative liabilities for the interest rate swap (6.63% p.a. to 11.80% p.a.).

 

The table below summarizes the notional and fair value amounts of the swap agreements as of June 30, 2019.

 

Cross-currency interest rate swap agreements Principal amount (notional) Fair value
     
Asset position: U.S. dollars + 6.6324% p.y. 4,573 5,064
Liability position: 11.8% p.y. (4,573) (4,867)
Net position (asset)   197
Current asset   197
Non-current asset   -

 

This loan was fully paid on August 22, 2019 as described in Note 24.

 

12.2.2Accounts payable to selling shareholders

 

  June 30, 2019   December 31, 2018
(unaudited)    
       
Acquisition of CCSI 5,689   8,990
Acquisition of IESP 109,978   115,656
Acquisition of FADEP 36,466   53,084
Acquisition of FASA 104,711   -
Acquisition of IPEMED 45,853   -
  302,697   177,730
Current 129,847   88,868
Non-current 172,850   88,862

 

On May 30, 2018, Afya Brazil acquired 60% of CCSI and the amount payable is adjusted by the IGP-M inflation rate and matures in November 2019.

 

On November 27, 2018, Afya Brazil acquired 80% of IESP and R$ 8,906 was paid in February 2019, and R$ 106,200 is payable in three equal installments of R$ 35,400, payable on November 27, 2019, November 27, 2020 and November 27, 2021 and adjusted by the CDI rate.

 

F-28 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

On December 5, 2018, Afya Brazil acquired 100% of FADEP and R$ 52,846 is payable in three equal installments of R$ 17,615, payable semi-annually from the transaction closing date and adjusted by the SELIC rate.

 

On April 3, 2019, Afya Brazil acquired 90% of FASA and R$ 40,880 is payable in April 2020; R$ 30,688 is payable in April 2021; and R$ 30,688 is payable in April 2022, adjusted by the IPCA rate + 4.1% per year.

 

On May 9, 2019, Afya Brazil acquired 100% of IPEMED and R$ 45,303 is payable in five installments of R$ 9,061, payable annually from February 20, 2020 to February 20, 2024, and adjusted by the CDI rate.

 

12.3Fair values

 

The table below is a comparison of the carrying amounts and fair values of the Company’s financial instruments, other than those carrying amounts that are reasonable approximation of fair values:

 

   

June 30, 2019

(unaudited)

  December 31, 2018
    Carrying amount   Fair value   Carrying amount   Fair value
Financial assets                
Restricted cash   25,524   25,524   18,810   18,810
Trade receivables (non-current)   9,728   9,728   5,235   5,235
Derivatives   197   197   1,219   1,219
Total   35,449   35,449   25,264   25,264
                 
Financial liabilities                
Loans and financing   96,982   98,673   77,829   78,813
Lease liabilities   273,583   273,583   -   -
Accounts payable to selling shareholders   302,697   302,697   177,730   177,730
Derivatives   1,507   1,507   -   -
Total   674,769   676,460   255,559   256,543

 

The Company assessed that the fair values of cash and cash equivalents, trade receivables and other current receivables, trade payables, advances from customers and other current liabilities approximate their carrying amounts largely due to the short-term maturities of these instruments.

 

Derivatives not designated as hedging instruments are recorded at fair value.

 

The fair value of interest-bearing borrowings and loans are determined by using the DCF method using discount rate that reflects the issuer’s borrowing rate as at the end of the reporting period. The own non-performance risk at June 30, 2019 was assessed to be insignificant.

 

F-29 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

12.4Financial instruments risk management objectives and policies

 

The Company’s principal financial liabilities, other than derivatives, comprise loans and financing, accounts payable to selling shareholders, trade payables and advances from customers. The main purpose of these financial liabilities is to finance the Company’s operations. The Company’s principal financial assets include trade receivables, cash and cash equivalents and financial investments classified as restricted cash that derive directly from its operations. The Company has also entered into derivative transactions to protect its exposure to foreign currency risk.

 

The Company is exposed to market risk, credit risk and liquidity risk. The Company monitors market, credit and operational risks in line with the objectives in capital management and counts with the support, monitoring and oversight of the Board of Directors in decisions related to capital management and its alignment with the objectives and risks. The Company’s policy is that no trading of derivatives for speculative purposes may be undertaken. The Board of Directors reviews and agrees policies for managing each of these risks, which are summarized below.

 

12.4.1Market risk

 

Market risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices. The Company’s exposure to market risk is related to interest rate risk and foreign currency risk. The sensitivity analysis in the following sections relate to the position as at June 30, 2019.

 

(i)Interest rate risk

 

Interest rate risk is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates. The Company’s exposure to the risk of changes in market interest rates relates primarily to the Company’s cash equivalents and financial investments classified as restricted cash with floating interest rates and accounts payable to selling shareholders.

 

Sensitivity analysis

 

The following table demonstrates the sensitivity to a reasonably possible change in interest rates on cash equivalents; restricted cash; loans and financing and derivatives (which were not settled in July and August 2019); and accounts payable to selling shareholders. With all variables held constant, the Company’s income before income taxes is affected through the impact on floating interest rate, as follows:

 

        Increase / decrease in basis points
 

June 30, 2019

(unaudited)

Index – % per

year

Base

rate

+75 -75 +150 -150
               
Cash equivalents 54,877 99.2% CDI 2,994 3,406 2,583 3,817 2,171
Restricted cash  25,524 99.43% CDI 1,396 1,587 1,204 1,779 1,013
Loans and financing  528 6.17% + CDI 62 66 58 70 54
Loans and financing  4,403 9.77% + CDI 672 705 639 738 606
Swap – liability position 74,986 128% CDI 5,279 5,841 4,717 6,404 4,154
Accounts payable to selling shareholders  109,978 CDI 6,049 6,874 5,224 7,698 4,399
Accounts payable to selling shareholders  45,853 CDI 2,522 2,866 2,178 3,210 1,834
               
Accounts payable to selling shareholders  5,689 IGPM 371 414 329 457 286
               
Accounts payable to selling shareholders  36,466 SELIC 2,006 2,279 1,732 2,553 1,459
               
Accounts payable to selling shareholders  104,711 IPCA + 4.1% 8,272 9,058 7,487 9,843 6,702

F-30 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

(ii)
Foreign currency risk

 

Foreign currency risk is the risk that the fair value or future cash flows of an exposure will fluctuate because of changes in foreign exchange rates. The Company’s exposure to the risk of changes in foreign exchange rates relates to the loan denominated in Euros in the amount of R$ 77,064 as of June 30, 2019 (December 31, 2018: R$ 77,829). The Company hs settled the loan denominated in US dollars in August 2019.

 

The Company manages its foreign currency risk in Euros and US dollars by entering in cross-currency interest rate swap agreement to mitigate ist exposure to the loans denominated in foreigh currencies with the same notional amount and loan’s maturities.

 

12.4.2Credit risk

 

Credit risk is the risk that a counterparty will not meet its obligations under a financial instrument or customer contract, leading to a financial loss. The Company is exposed to credit risk from its operating activities (primarily trade receivables) and from its financing activities, including cash and cash equivalents and restricted cash.

 

Customer credit risk is managed by the Company based on the established policy, procedures and control relating to customer credit risk managed. Outstanding customer receivables are regularly monitored. See Note 7 for additional information on the Company’s trade receivables.

 

Credit risk from balances with banks and financial institutions is management by the Company’s treasury department in accordance with the Company’s policy. Investments of surplus funds are made only with approved counterparties and within limits assigned to each counterparty.

 

The Company’s maximum exposure to credit risk for the components of the statement of financial position at June 30, 2019 and December 31, 2018 is the carrying amounts of its financial assets.

 

12.4.3Liquidity risk

 

The Company’s Management has responsibility for monitor liquidity risk. In order to achieve the Company’s objective, Management regularly reviews the risk and maintains appropriate reserves, including bank credit facilities with first tier financial institutions. Management also continuously monitors projected and actual cash flows and the combination of the maturity profiles of the financial assets and liabilities.

 

The main requirements for financial resources used by the Company arise from the need to make payments for suppliers, operating expenses, labor and social obligations, loans and financing and accounts payable to selling shareholders.

 

F-31 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

The tables below summarize the maturity profile of the Company’s financial liabilities based on contractual undiscounted amounts:

 

As of June 30, 2019 (unaudited)

 

Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total
Trade payables 19,856 - - - 19,856
Loans and financing 61,664 35,318 - - 96,982
Lease liabilities 37,094 58,735 42,557 135,197 273,583
Accounts payable to selling shareholders 129,847 154,509 18,341 - 302,697
Advances from customers 19,644 - - - 19,644
Dividends payable 39,331 - - - 39,331
Derivatives 959 548 - - 1,507
  308,395 249,110 60,898 135,197 753,600

 

12.5Changes in liabilities arising from financing activities

 

  January 1, 2019   Cash flows   Additions   Interest  

Business

combination

  Foreign exchange movement   Other   June 30, 2019
Loans and financing 77,829   (23,868)   -   1,792   43,087   (1,858)   -   96,982
Lease liabilities 212,360   (17,316)   2,634   14,540   61,365   -   -   273,583
Dividends payable 4,107   (7,621)   46,952   -   -   -   (4,107)   39,331
Total 294,296   (48,805)   49,586   16,332   104,452   (1,858)   (4,107)   409,896
                               
  January 1, 2018   Cash flows   Additions   Interest  

Business

combination

  Foreign exchange movement   Other   June 30, 2018
Loans and financing 3,823   (3,981)   -   158   -   -   -   -
Dividends payable 14,888   -   -   -   -   -   -   14,888
Related parties 105   -   -   -   -   -   -   105
Total 18,816   (3,981)   -   158   -   -   -   14,993

F-32 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

13Fair value measurement

 

The following table provides the fair value measurement hierarchy of the Company’s assets and liabilities as of June 30, 2019 and December 31, 2018.

 

  Fair value measurement
 

Total

 

Quoted prices in active markets (Level 1) Significant observable inputs (Level 2)

Significant unobservable inputs (Level 3) 

June 30, 2019 (unaudited)        
Assets measured at fair value:        
Derivative financial assets        
Cross-currency interest rate swaps 197 - 197 -
Assets for which fair values are disclosed        
Trade receivables (non-current) 9,728 - 9,728 -
Restricted cash 25,524 - 25,524 -
Liabilities for which fair values are disclosed        
Loans and financing (98,673) - (98,673) -
Lease liabilities (273,583) - (273,583) -
Accounts payable to selling shareholders (302,697) - (302,697) -
Liabilities measured at fair value:        
Derivative financial liabilities        
Cross-currency interest rate swaps (1,507) - (1,507) -

 

  Fair value measurement
 

Total

 

Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3)
December 31, 2018        
Assets measured at fair value:        
Derivative financial assets        
Cross-currency interest rate swaps 1,219 - 1,219 -
Assets for which fair values are disclosed        
Trade receivables (non-current) 5,235 - 5,235 -
Restricted cash 18,810 - 18,810 -
Liabilities for which fair values are disclosed        
Loans and financing (78,813) - (78,813) -
Accounts payable to selling shareholders (177,730)

-

(177,730)

-

F-33 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

14Capital management

 

For the purposes of the Company’s capital management, capital considers total equity. The primary objective of the Company’s capital management is to maximize the shareholder value.

 

The Company manages its capital structure and makes adjustments in light of changes in economic conditions and to maintain and adjust the capital structure, the Company may adjust the dividend payment to shareholders, return capital to shareholders or issue new shares. The Company monitors capital using net debt and total equity. The Company includes within net debt, loans and financing less cash and cash equivalents and restricted cash.

 

  June 30, 2019   December 31, 2018
  (unaudited)    
       
Loans and financing 96,982   77,829
Lease liabilities 273,583   -
Accounts payable to selling shareholders 302,697   177,730
Less: cash and cash equivalents (68,471)   (62,260)
Less: restricted cash (25,524)   (18,810)
Net debt 579,267   174,489
Total equity 1,069,685   590,354
Total equity and net debt 1,648,952   764,843

 

No changes were made in the objectives, policies or processes for managing capital during the six-month period ended June 30, 2019.

 

15Labor and social obligations

 

a)Variable compensation (bonuses)

 

The Company recorded bonuses related to variable compensation of employees and management in cost of services and general and administrative expenses in the amount of R$ 1,741 and R$ 1,205 during the six-month periods ended June 30, 2019 and 2018, respectively.

 

b)Share-based compensation plans

 

The fair value of the stock options was estimated at the grant date using the Monte Carlo pricing model for Afya Brazil and Black & Scholes pricing model for the Guardaya’s plan, taking into account the terms and conditions on which the stock options were granted. The exercise price of the stock options granted is monetarily adjusted by the CDI rate. The Company accounts for the stock options plan as an equity-settled plan.

 

F-34 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

The stock options granted in February 2019 had the following vesting periods after the grant date: 10% after 90 days, 15% after 15 months, 25% after 27 months, 25% after 39 months and 25% after 51 months.

 

The Guardaya’s stock options had the following vesting periods: 10% after 1 year, 15% after 2 years, 25% after 3 years and 50% after 4 years.

 

The stock options vest immediately at the following liquidity events: (i) an IPO, (ii) changes in the Company’s control group; and (iii) sale of Crescera’s interest on Afya Brazil. On July 19, 2019, Afya Limited completed its IPO and the stock options became vested.

 

The share-based compensation expense recognized in general and administrative expenses in the statement of income in the six-month period ended June 30, 2019 was R$ 1,909 (R$ 911 in the six-month period ended June 30, 2018).

 

The following table illustrates the number and movements in stock options during the period:

 

 

Number of

 stock options

Outstanding at January 1, 2019 (unaudited) 46,116
Granted 10,495
Forfeited -
Addition of Guardaya’s Plan 9,190
Exercised -
Expired -
Outstanding at June 30, 2019 (unaudited) 65,801

 

The following table list the inputs to the model used to determine the fair value of the stock options:

 

     
  05/15/2018 02/07/2019 03/29/2019*
       
Weighted average fair value at the measurement date R$ 366.16 R$ 529.12 R$ 684.22
Dividend yield (%) 0.0% 0.0% 0.0%
Expected volatility (%) 49.5% 45.5% 43.7%
Risk-free interest rate (%) 7.7% 7.6% 7.2%
Expected life of stock options (years) 4.0 4.0 4.0
Weighted average share price R$254.13 R$ 368.41 R$ 213.35
Model used Monte Carlo Monte Carlo Black & Scholes
         

*After the corporate reorganization described in Note 1, the options originally granted under the Guardaya’s plan granted on August 10, 2018 were remeasured at fair value and included in Afya Brazil’s plan with no changes to the previous terms and conditions other than the shares subject to such options granted and, consequently, the number of stock and exercise price of the shares as per the share exchange ratio applied on the corporate reorganization.

 

F-35 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

16Equity

 

a.Share capital

 

As of June 30, 2019, the Company’s share capital was R$ 635,830 comprised by 2,643,320 common shares.

 

As of December 31, 2018, the share capital was R$ 315,000 comprised by 1,443,541 shares (1,411,895 common shares, 26,523 Class A preferred shares and 5,123 Class B preferred shares).

 

On March 8, 2019, the shareholders approved (i) a renounce of dividends for the year ended December 31, 2016 of R$ 4,107; (ii) an increase of capital through the issuance of 37,200 common shares, in the amount of R$ 0.01, subscribed entirely by the shareholders BR Health and certain members of the Esteves Family; and (iii) a change in the conversion ratio of the Company's Class A preferred shares into common shares, which changed from one Class A preferred share into 17.7 common shares to one Class A preferred share to 23.74 common shares; and equal change in the distribution ratio of the priority dividends of the Company's Class A preferred shares.

 

On March 12, 2019, the shareholders approved (i) the change in the Company's legal name to Afya Participações S.A.; (ii) the conversion of all of the 26,523 Class A preferred shares into 629,656 common shares, in the ratio of 1 Class A preferred share to 23.74 common shares; (iii) the conversion of all of the 5,123 Class B preferred shares into 5,123 common shares at a ratio of one Class B preferred share for one common share; (iv) the extinguishment of 26,523 Class A preferred shares and 5,123 Class B preferred shares. There was no right of withdrawal, since the Afya Brazil's existing Class A and Class B preferred shares were converted into common shares in the proportions previously approved by the shareholders at the Extraordinary General Meeting; (v) a capital increase through the issuance of 156,337 common shares, in the amount of R$ 150,000, subscribed entirely by BR Health; and (vi) the propose to repurchase 160,000 common shares issued by the Company, at the acquisition price of R$ 206.25 per share, in the total amount of R$33,001, all held by the shareholder Nicolau Carvalho Esteves. The Company's common shares object of the repurchase approved were immediately canceled by the Company, without reduction of its share capital.

 

On March 29, 2019, the Company issued 378,696 common shares in exchange of the acquisition of Guardaya to the shareholders of BR Health and Guardaya, and had a capital increase of R$ 122,062 and an additional paid-in capital of R$ 137,051.

 

In June 2019, the shareholders approved an increase of capital through the issuance of 157,202 common shares in exchange of the acquisitions of FASA, IESP and Univaço minority interest, in the total amount of R$ 24,310.

 

On June 18, 2019, the shareholders approved an increase of capital through the issuance of 27,211 common shares in exchange of the acquisition of an addition 15% interest at UEPC, in the total amount of R$ 24,458, subscribed entirely by the shareholder Bozano Educacional II Fundo de Investimento em Participações Multiestratégia.

 

F-36 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

On August 14, 2019, Afya Limited increased Afya Brazil’s share capital in the amount of R$ 961,433, representing 1,405,140 common shares.

 

b.Additional paid-in capital

 

Additional paid-in capital includes fair value adjustments on the capital contribution of IESP and FASA, which were recorded as acquisition of non-controlling interest.

 

c.Dividends

 

On June 13, 2019, Afya Brazil approved the payment of interim dividends totaling R$38 million to Afya Brazil shareholders of record on June 13, 2019. The dividend amount was determined based on Afya Brazil’s net income for the five months ended May 31, 2019. Neither Afya nor the public shareholders of Afya will be entitled to receive such dividend. The dividend is expected to be paid in 2019.

 

17Earnings per share (EPS)

 

Basic EPS is calculated by dividing net income attributable to the equity holders of the Company by the weighted average number of common and preferred shares outstanding during the period.

 

Diluted EPS is calculated by dividing net income attributable to the equity holders of the parent by the weighted average number of common shares outstanding during the period plus the weighted average number of shares that would be issued on conversion of all potential shares with dilutive effects.

 

Diluted earnings per share are computed including stock options granted to key management using the treasury shares method when the effect is dilutive. The Company has the stock option plan in the category of potentially dilutive shares.

 

F-37 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

The following table reflects the net income and share data used in the basic and diluted EPS calculations:

 

  Three-month period ended   Six-month period ended
  June 30, 2019   June 30, 2018   June 30, 2019   June 30, 2018
  (unaudited)   (unaudited)   (unaudited)   (unaudited)
Numerator              
Net income attributable to equity holders of the parent for basic earnings 16,317   20,462   57,852   37,974
               
Denominator*              
Weighted average number of outstanding shares 2,486,735   1,238,885   2,276,447   1,194,490
Effects of dilution from stock options 46,254   21,589   46,254   21,589
               
Weighted average number of outstanding shares adjusted for the effect for the effect of dilution 2,532,989   1,260,474   2,322,701   1,216,079
               
Basic earnings per share - R$ 6.56   16.52   25.41   31.79
Diluted earnings per share - R$ 6.44   16.23   24.91   31.23

* Reflects the conversion of all Class A and Class B preferred shares into common shares approved by the Company´s shareholders on March 12, 2019, considering a ratio of one Class A preferred share into 23.74 common shares and a ratio of one Class B preferred share into one common share. As required by IAS 33 – Earnings per Share, the calculation of basic and diluted earnings per share was adjusted retrospectively to reflect the conversion of the weighted average of Class A and Class B preferred shares into common shares. For the three- and six-month periods ended June 30, 2018, the Company had only common shares.

 

18Revenue

 

  Three-month period ended   Six-month period ended
  June 30, 2019   June 30, 2018   June 30, 2019   June 30, 2018
  (unaudited)   (unaudited)   (unaudited)   (unaudited)
               
Tuition fees 208,183   85,655   376,574    154,993
Other 10,782   793   11,778    1,373
Deductions              
  Granted discounts (15,353)   (2,141)   (21,459)   (2,963)
  Early payment discounts (1,056)   -   (1,721)    -   
  Returns (2,129)   (326)   (3,250)   (989)
  Taxes (6,349)   (2,568)   (11,242)   (4,651)
  PROUNI (15,585)   (6,178)   (27,609)   (11,208)
Net revenue from contracts with customers 178,493   75,235     323,071   136,555
Timing of revenue recognition of net revenue from contracts with customers              
Tuition fees - Transferred over time 169,545    74,545   313,273    135,356
Other revenue - Transferred at a point in time 8,948    690   9,798    1,199

F-38 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

The following table presents statements of income for the Company’s operating segments for the six-month period ended June 30, 2019:

  

Revenue by Segment

Business

Unit 1
(Unaudited)

Business 

Unit 2
(Unaudited)

Total
(Unaudited)
Elimination (inter-segment transactions) Consolidated (Unaudited)
Types of services or goods 301,518 23,371 324,889 (1,818) 323,071
Tuition fees 300,890 12,383 313,273 - 313,273
Other 628 10,988 11,616 (1,818) 9,798
Timing of revenue recognition 301,518 23,371 324,889 (1,818) 323,071
Transferred over time 300,890 12,383 313,273 - 313,273
Transferred at a point in time 628 10,988 11,616 (1,818) 9,798
             

 

The Company`s revenue from contracts with customers are all in Brazil. The Company is not subject to the payment of the social integration program tax (Programa de Integração Social, or PIS) and the social contribution on revenues tax (Contribuição para o Financiamento da Seguridade Social, or COFINS) on the sale of undergraduation degrees under the PROUNI program.

 

F-39 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

19
Expenses and cost by nature

 

  Three-month period ended   Six-month period ended  
  June 30, 2019   June 30, 2018   June 30, 2019   June 30, 2018
  (unaudited)   (unaudited)   (unaudited)   (unaudited)
               
Cost of services 82,283   38,680   136,647   66,875
General and administrative expenses 59,584   14,583   90,818   28,846
Total 141,867   53,263   227,465   95,721
               
Payroll 85,561   36,488   141,633   63,491
Hospital and medical agreements 3,329   1,900   6,016   3,104
Depreciation and amortization 19,387   2,125   28,441   3,405
Rent 959   4,522   1,047   8,446
Commercial expenses 609   -   628   -
Utilities 1,873   667   2,961   1,033
Maintenance 2,552   1,159   4,048   1,620
Tax expenses 817   362   1,431   565
Pedagogical services 1,268   296   2,077   1,274
Sales and marketing 3,984   939   4,985   1,690
Share-based compensation 868   911   1,909   911
Travel expenses 1,890   551   2,620   789
Allowance for doubtful accounts 4,803   (355)   8,606   2,382
Consulting fees 2,213   322   2,486   723
Other 11,754   3,376   18,577   6,288
Total 141,867   53,263   227,465   95,721
                     

F-40 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

20Finance result

 

  Three-month period ended   Six-month period ended
  June 30, 2019   June 30, 2018   June 30, 2019   June 30, 2018  
  (unaudited)   (unaudited)   (unaudited)   (unaudited)  
                 
Income from financial investments 1,783   1,161   3,283   1,558  
Foreign exchange variation 743   -   1,858   -  
Interest received 1,410   738   3,915   2,018  
Other 714   37   761   48  
Finance income 4,650   1,936   9,817   3,624  
                 
Change in fair value of derivative instruments (842)   -   (2,809)   -  
Interest expense (7,599)   (235)   (9,873)   (436)  
Interest expense on lease liabilities (8,122)   -   (14,540)   -  
Financial discounts granted (1,053)   (990)   (1,265)   (1,594)  
Bank fees (636)   (284)   (1,029)   (521)  
Other (1,469)   (43)   (2,441)   (52)  
Finance expenses (19,721)   (1,552)   (31,957)   (2,603)  
                 
Finance result (15,071)   384   (22,140)   1,021  
                     

 

21Income taxes

 

Reconciliation of income taxes expense

 

    Three-month period ended   Six-month period ended
    June 30, 2019   June 30, 2018   June 30, 2019   June 30, 2018
    (unaudited)   (unaudited)   (unaudited)   (unaudited)
                 
Income before income taxes   23,051   22,858   74,756   43,109
Combined statutory income taxes rate - %   34%   34%   34%   34%
Income taxes at statutory rates   (7,837)   (7,770)   (25,416)   (14,656)
Reconciliation adjustments:                
PROUNI - Fiscal incentive (a)   7,919   10,246   27,866   17,121
Revenue effect not incentivized   (1,031)   -   (2,670)   -
Other   (776)   (2,743)   (3,734)   (4,126)
Income taxes expense – current   (1,725)   (267)   (3,954)   (1,661)
Effective rate   (7,5%)   (1.2%)   (5,3)%   (3,9)%

 

(a)  The Company adhered to PROUNI, established by Law 11,096 / 2005, which is a Brazilian federal program that exempt companies of paying income taxes and social contribution.

 

Deferred income taxes

 

As of June 30, 2019, the Company had unrecognized deferred income tax assets on temporary differences in the amount of R$ 24,565 (R$ 7,849 in December 31, 2018) which does not have any tax planning opportunities available that could support the recognition of these temporary differences as deferred tax assets. Accordingly, the Company did not recognize deferred tax assets.

 

F-41 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

22Provision for legal proceedings

 

The provisions related to labor and civil proceedings whose likelihood of loss is assessed as probable are as follows:

 

  Labor   Civil   Total
           
Balances as of December 31, 2018 2,233   1,232   3,465
Business combinations 2,699   993   3,692
Additions 837   427   1,264
Reversals (1,039)   (572)   (1,611)
Balances as of June 30, 2019 (unaudited) 4,730   2,080   6,810

 

There are other civil, labor, taxes and social security proceedings assessed by Management and its legal counsels as possible risk of loss, for which no provisions are recognized, as follows:

 

  June 30, 2019   December 31, 2018
  (unaudited)    
       
Labor 1,242   572
Civil 24,371   26,816
Taxes and social security 698   391
Total 26,311   27,779

 

The Company has judicial deposits recorded in other assets (non-current) in the amount of R$ 271 as of June 30, 2019 (December 31, 2018: R$ 327).

 

Under the terms of the Share Purchase and Sale Agreements ("Agreements") between the Company and the selling shareholders of the subsidiaries acquired, the Company assesses that the selling shareholders are exclusively responsible for any provisions (including labor, tax and civil), which are or will be the subject of a claim by any third party, arising from the act or fact occurred, by action or omission, prior to or on the closing dates of the acquisitions.

 

Accordingly, and considering that the provisions for legal proceedings recorded by the Company that result from causes arising from events occurring prior to the closing dates of the acquisitions, any liability for the amounts to be disbursed, in case of their effective materialization in loss, belongs exclusively to the selling shareholders. In this context, the Agreements state that the Company and its subsidiaries are identified and therefore exempt from any liability related to said contingent liabilities and, therefore, the provision amounts related to such contingencies are presented in the non-current liabilities and the correspondent amount of R$ 3,673 (December 31, 2018: R$ 3,091) is presented in other assets in the non-current assets.

 

23Non-cash transactions

 

During the six-month periods ended June 30, 2019, the Company carried out non-cash transactions which are not reflected in the statement of cash flows. The main non-cash transactions are related to the business combinations described in Note 4 – Business combinations, acquisitions of non-controlling interests in Univaço, IESP and FAS, and the right-of-use assets and lease liabilities described in Note 2.3.

 

F-42 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

24Subsequent events

 

a)Stock options exercise

 

On July 31, 2019, 1,842,428 stock options, under the share-based compensation plan of Afya Brazil, were exercised into 1,842,428 Class A common shares of Afya Limited, through cash settled of US$ 4,682 thousand (or R$ 17,554, at the exchange rate of R$ 3.7489 per US$ 1.00).

 

Afya Limited’s directors, executive officers and substantially all of the equity holders have agreed, subject to certain exceptions, not to sell or transfer any Class A and B common shares or securities convertible into, exchangeable for, exercisable for, or repayable with Class A common shares, for 180 days after the date of the IPO.

 

b)Settlement of loans and financing

 

On July 4, 2019, the Company settled a loan agreement with Itaú Unibanco S.A. denominated in Brazilian reais in the total amount of R$ 7,564. As result of the settlement, R$ 3,743 of restricted cash, pledged as collateral of such loan, may be withdrawn by the Company.

 

On July 5, 2019, the Company settled a loan agreement with Banco Santander (Brasil) S.A. denominated in Brazilian reais in the total amount of R$ 5,001. As result of the settlement, R$ 2,033 of restricted cash, pledged as collateral of such loan, may be withdrawn by the Company.

 

On August 22, 2019, the Company settled a loan agreement with Banco Bradesco S.A. denominated in U.S. dollars in the total amount of R$ 4,669 Such agreement had no restricted cash pledged as collateral.

 

c)Acquisition of IPEC—Instituto Paraense de Educação e Cultura Ltda.

 

On August 13, 2019, Afya Brazil entered into a purchase agreement with the shareholders of IPEC—Instituto Paraense de Educação e Cultura Ltda. (“IPEC”). providing for the acquisition of 100% of IPEC. IPEC is a non-operational postsecondary education institution with governmental authorization to offer on-campus post-secondary undergraduate courses in medicine in the State of Pará. The purchase price of R$ 108,000 is comprised of: i) R$ 54,000 paid in cash on the acquisition date; ii) R$ 54,000 is payable in two equal instalments of R$ 27,000 payable annually from August 13, 2020 to August 13, 2021, and adjusted by the CDI rate. The acquisition date fair value of each major class of consideration, including the allocation of the purchase price has not been completed by Afya Brazil as of the date of these financial statements. The impact on revenue and profit or loss of the combined entity for the current reporting period as if the acquisition date had been as of the beginning of the annual reporting period is not available as the acquisition was recently concluded by Afya Brazil. Therefore the financial statements do not include this information. Transaction costs to date totaled R$ 80. Any goodwill generated in the transaction is not expected to be deductible for tax purposes.

 

F-43 

Afya Participações S.A.

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

d)
Medical School Authorization - Abaetetuba-PA

 

On August 27, 2019 the Secretary of Regulation and Supervision of Higher Education of the Ministry of Education (“MEC”) authorized the operation of the medical school in Abaetutuba in the State of Pará, in connection with a bid issued by the Secretariat for Regulation and Supervision of Post-Secondary Education (“SERES”), as part of the public procurement for the ‘‘Mais Medicos’’ program, awarded to ITPAC Porto Nacional.

 

The authorization contributed approximately 50 medical seats to Afya, with that Afya will reach 1,522 medical school seats.

 

***

 

F-44