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 December, 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 Press release dated December 2, 2019 – Afya Limited Announces Third Quarter and Nine-Month 2019 Financial Results
99.2 Unaudited Interim Condensed Consolidated Financial Statements as of and for the nine months ended September 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: December 2, 2019

 

 

 

 

Exhibit 99.1

 

Afya Limited Announces Third Quarter and Nine-Month 2019 Financial Results

 

Strong Third Quarter Results Positions the Company to Deliver Second Half 2019 Guidance

 

Nova Lima, Brazil, December 2, 2019 – Afya Limited (Nasdaq: AFYA) (“Afya” or the “Company”), the leading medical education group in Brazil, today reported unaudited financial and operating results for the three- and nine-month periods ended September 30, 2019. Financial results are expressed in Brazilian Reais and are presented in accordance with International Financial Reporting Standards.

 

3Q19 Key Financial and Operating Highlights

 

·Net Revenue grew by 123.7% year over year (YoY) reaching R$206.7 million, reflecting Afya´s organic growth and acquisitions consolidation.

 

·Medical schools’ tuition fees, which represented 69% of total combined tuition fees, increased 148% YoY, due to the maturation and acquisition of medical school seats and average medical tuition fees raising above inflation indexes.

 

·Adjusted EBITDA of R$80.9 million, up 147.3% YoY, with Adjusted EBITDA margin in the quarter expanding 380 basis points (bps) increased to 39.2% from 35.4% in 3Q18.

 

·Adjusted Net Income of R$72.4 million, up 155.0% YoY.

 

Financial Highlights1              
(in thousand of R$) Third Quarter   Nine Months
  2019 2018 % Chg   2019 2018 % Chg
(a) Net Revenue 206,713 92,426 123.7%   529,784 227,695 132.7%
(b) Pro forma Net Revenue ² 206,713 - -   608,984 - -
(c) Adjusted EBITDA 80,929 32,728 147.3%   203,104 81,361 149.6%
(d) = (c )/(a)  Adjusted EBITDA Margin 39.2% 35.4% + 380 b.p   38.3% 35.7% + 260 b.p
(e) Pro forma Adjusted EBITDA²  80,929 - -   231,290 - -
(f) = (e)/(b)   Pro forma Adjusted EBITDA² Margin 39.2% - -   38.0% - -
(g) Adjusted Net Income 72,403 28,391 155.0%   163,938 71,299 129.9%

1. See more information on "Non-GAAP Financial Measures" (Item 7).

2. Includes the pro-forma results of Medcel, IPEMED and FASA, as if the acquisition had been consummated on January 1, 2019. See more information on "Unaudited Pro Forma Condensed Consolidated Financial Information” (Item 8).

  

CEO Statement

 

“We are pleased to announce our third quarter results, which leaves us in a strong position to deliver the 2H19 guidance we provided last quarter.

 

We have been making significant progress with our strategic initiatives, including the integration of recent acquisitions to derive synergies and become more cost efficient. We remain focused on our M&A strategy and in our goal to acquire 1,000 medical school seats over the next three years. Considering the 232 seats recently added, we are at ~25% of our goal and we continue to explore attractive acquisition targets that would fit in well with our strategy. Moreover, with the acquisitions of IPEC in Marabá and UniRedentor in Itaperuna, Afya is entering into the states of Pará and Rio de Janeiro. To the extent the UniRedentor transaction is consummated, we will acquire a portfolio of complementary graduate programs focused on medical and other healthcare related specializations.

 

We are also excited about our Preparatory Courses & CME and Specialization Programs, whose core products grew 12% versus 1H19. Following our tech development roadmap, we are happy to have just launched our new academic personalized tutoring system to increase student engagement and performance.

 

To conclude, we are the leading medical education company in Brazil and we expect to continue to aim to deliver attractive growth, profitability, cash generation and quality, providing the highest standards

 

1

 

in medical education, with our methodology and technological platform. We believe our business model has been delivered successfully and we expect to enhance our market position and financial performance as a result. We will remain focused on driving the brand forward and aiming to provide value to all of our stakeholders”.

 

1.Second Half 2019 Guidance

 

Afya reaffirms its guidance for the second half of 2019 as provided on September 2, 2019:

 

·2H19 Pro Forma Net Revenues: between R$415 million and R$430 million.

 

·2H19 Pro Forma Adjusted EBITDA Margin: ranging between 38% and 40%.

 

Consequently, Pro Forma Net Revenues for the full year of 2019 is expected to range between R$817 million and R$832 million. Moreover, Pro Forma Adjusted EBITDA for the full year of 2019 is expected to range between R$308 million and R$322 million.

 

Guidance Assumptions:

 

·Maturation of several medical schools is expected to result in a higher enrollment base in 2H vs 1H of each year.

 

·We expect to improve efficiencies and extract synergies from companies acquired in 2Q19 (FASA and IPEMED), which in turn us expected to improve the revenues and margins of FASA and IPEMED in 2H19.

 

·Excludes acquisition of IPEC and any other acquisition that we may conclude in 2H2019.

 

·Eliminates the impact of the adoption of IFRS16 in 2019.

 

Afya already achieved part of the guidance as it recorded Net Revenue of R$206.0 million and Adjusted EBITDA of R$80.6 million in the three-months ended September 30, 2019, if IPEC’s results are excluded.

 

2.Overview of 3Q19 Results

 

Operational Review

 

The Company operates two distinct business units. The first (Business Unit 1 or BU1), is comprised of Undergraduate – medical schools, other healthcare programs and ex-health degrees. Revenue is generated from the monthly tuition fees the Company charges students enrolled in the undergraduate. The Company also offers Residency Preparatory and Specialization Programs (Business Unit 2 or BU2). Revenue is comprised of fees from these programs.

 

2

 

 

 

  Third Quarter
  2019 2018 % Chg
Business Unit 1: Educational Services Segment       
MEDICAL SCHOOL      
Approved Seats                    1,572                   636 147.2%
Operating Seats                     1,222                   636 92.1%
Total Students                    6,388               3,008 112.4%
Tuition Fees (R$MM)              155,341            62,690 147.8%
Medical School Average Ticket (R$/month)                    8,106               6,947 16.7%
UNDERGRADUATE HEALTH SCIENCE      
Total Students                    6,494               2,250 188.6%
Tuition Fees (R$MM)                 26,257            11,928 120.1%
OTHER UNDERGRADUATE       
Total Students                 10,878               3,774 188.2%
Tuition Fees (R$MM)                 44,170            13,185 235.0%
Business Unit 2: Prep Courses & CME and Medical Specialization    
Active Paying Students      
      Prep Courses & CME                    9,854  -  -
     Medical Specialization                     1,803  -  -
Revenue from courses (R$MM)                 39,598  -  -

 

Revenue

 

Revenue & Revenue Mix               
(in thousand of R$) Third Quarter   Nine Months
  2019 2018 % Chg   2019 2018 % Chg
Net Revenue Mix              
    Business Unit-1 176,113 92,426 90.5%   477,631 227,695 109.8%
    Business Unit-2 32,662 0 -   56,033 0 -
    Inter-segment transactions -2,062 0 -   -3,880 0 -
Total Reported Net Revenue 206,713 92,426 123.7%   529,784 227,695 132.7%
Total Pro Forma1 Net Revenue 206,713 - -   608,984 - -
               

 

1.Includes the pro-forma results of Medcel, IPEMED and FASA, as if the acquisition had been consummated on January 1, 2019. See more information on "Unaudited Pro Forma Condensed Consolidated Financial Information” (Item 8).

 

Total Net Revenue for three-months ended September 30, 2019 was R$206.7 million, an increase of 123.7% over the same period of last year. This increase was primarily due to: (i) organic revenue growth, mainly due to the increase of medical school enrollments, (ii) consolidation of the operating results of NOVAFAPI, FADEP and FASA, which were acquired after September 30, 2018 and added 553 medical school seats to our total medical school seats base, and (iii) consolidation of the results of operations of IPEMED and Medcel (BU2).

 

For the nine-months ended September 30, 2019, Net Revenue increased 132.7% to R$529.8 million, compared to R$227.7 million for the nine-months ended September 30, 2018, as a result of the abovementioned factors. Pro-forma Net Revenue was R$609.0 million for the nine-months ended September 30, 2019 (see Pro-forma Net Revenue reconciliation – item 10).

 

Revenue Recognition and Seasonality

 

Two seasonality factors affect Afya’s business. The first is associated with the concentration of prep. course revenues in the first and fourth quarters of each year, when new content (books and e-books) is delivered and revenues are recognized. The second is associated with the maturation of several medical schools, which leads to a higher enrollment base in the second half of each year. As a result, in a typical year, the first and fourth quarters are normally the strongest, followed by the third and second quarters, respectively. Finally, the second half of the year is normally stronger than the first half.

 

3

 

Adjusted EBITDA and Proforma Adjusted EBITDA

 

Adjusted EBITDA in three-months ended September 30, 2019 increased 147.3% to R$80.9 million, from R$32.7 million in the three-months ended September 30, 2019, with a margin of 39.2% in the three-months ended September 30, 2019, compared to 35.4% in the three-months ended September 30, 2018, respectively, reflecting operating leverage and synergies obtained from recent acquisitions.

 

For the nine-months ended September 30, 2019, Adjusted EBITDA increased 149.6% to R$203.0 million, compared to R$81.4 million for the nine-months ended September 30, 2018. The Adjusted EBITDA margin was 38.3% and 35.7% for the nine-months ended September 30, 2019 and 2018, respectively. Pro-forma Adjusted EBITDA was R$231.3 million for the nine-months ended September 30, 2019 (see the Adjusted EBITDA and Pro-forma Adjusted EBITDA reconciliation – items 12 and 13)

 

Adjusted Net Income

 

During the three-months ended September 30, 2019, the Company reported Adjusted Net Income of R$72.4 million, compared to R$28.4 million in the three-months ended September 30, 2018, an increase of 155.0%, mainly due to: (i) the synergies captured and margins expansion; (ii) the acquisitions consolidation during this period and (iii) the higher financial income and FX gain associated with the IPO proceeds.

 

For the nine-months period ended September 30, 2019, Adjusted Net Income was R$163.9 million, an increase of 129.9% from the nine-months ended September 30, 2018 (see the Adjusted Net Income reconciliation – item 11).

 

Balance Sheet and Cash Flow

 

Cash and cash equivalents at September 30, 2019 was $993.5 million, compared to $62.3 million at year end 2018, and primarily reflects the proceeds from the IPO.

 

For the nine-month period ended September 30, 2019, Afya reported an adjusted cash generation from operations of R$202.8 million compared to $63.9 million in 9M18.

 

Operating Cash Conversion Ratio for the nine-month period ended September 30, 2019 increased to 108.4% from 84.0% for the nine-month period ended September 30, 2018, mainly due to a higher pre-payment of students in the third quarter and Medcel seasonality (see more on page 2). Due to the seasonality effects, we recommend to analyze the cash conversion metric over longer periods rather than on a quarterly basis.

 

4

 

 

(in thousand of R$)     Third Quarter   Nine Months
      2019 2018 % Chg   2019 2018 % Chg
(a) Cash flow from operations     121,837 30,450 300.1%   230,647 63,861 261.2%
(b) Payment of lease liabilities1     -10,495 0     -27,811 0  
(c) = (a) + (b) Adjusted cash flow from operations     111,342 30,450 265.7%   202,836 63,861 217.6%
Operations                  
(d) Adjusted EBITDA     80,929 26,912 200.7%   203,104 81,361 149.6%
(e) Non-recurring expenses:     7,728 3,809 102.9%   16,058 5,305 202.7%
 - Integration of new companies 2     893 133 573.0%   4,500 635 608.6%
 - M&A advisory and due diligence  3     289 7 4033.4%   1,388 157 784.1%
 - Expansion projects 4     468 5 10003.2%   1,411 351 302.3%
 - Restructuring Expenses 5     6,078 3,664 65.9%   8,759 4,162 110.5%
(f) = (d) - (e) Adjusted EBITDA ex- non-recurring expenses      73,201 23,103 216.8%   187,046 76,056 145.9%
(g) = (c) / (f) Operating cash conversion ratio     152.1% 131.8% 20.3%   108.4% 84.0% 24.5%

(1) Consists of payment of lease liabilities recorded under IFRS 16 as from January 1, 2019.

(2) Consists of expenses related to the integration of newly acquired companies.

(3) Consists of expenses related to professional and consultant fees in connection with due diligence services for M&A transactions.

(4) Consists of expenses related to professional and consultant fees in connection with the opening of new campuses.

(5) Consists of expenses related to the employee redundancies in conneciotn with the organizational restructuring of acquied companies.  

 

3.Subsequent Events

 

Afya Acquires UniRedentor

 

On November 4, 2019 Afya announced the acquisition of UniRedentor, a non-for-profit post-secondary education institution the State of Rio de Janeiro, for a total consideration of R$225M, including R$125M in cash and R$20M payable in five equal installments through June 2024. In 2018, UniRedentor’s gross revenue totaled R$108M. The transaction is subject to antitrust regulatory approval and other precedent conditions. If successfully concluded, this acquisition will contribute 112 medical school seats to Afya, with a potential upside of 44 additional seats already requested to MEC, and will also strengthen Afya’s presence in medical graduation courses.

 

4.Conference Call and Webcast Information

 

When: December 2, 3019 at 11:00 a.m. ET.

 

     
Who:  

Mr. Virgilio Gibbon, Chief Executive Officer

Mr. Luciano Campos, Chief Financial Officer
Ms. Renata Costa Couto, Head of Investor Relations

 

Dial-in: +1-877- 591-8895 (U.S. Toll-Free); +1-339-998-3013 (International). Conference ID: 7059307

 

Webcast: ir.afya.com.br

 

Replay: Available between December 2, 2019 until December 6, 3019, by dialing +1-855-859-3059 (U.S. domestic) or +1-404-537-3409 (International), conference ID: 7059307.

 

5.About Afya Limited (Nasdaq: AFYA)

 

Afya is the leading medical education group in Brazil based on number of medical school seats, delivering an end-to-end physician-centric ecosystem that serves and empowers students to be lifelong medical learners from the moment they join us as medical students through their medical residency preparation, graduation program, and continuing medical education activities. For more information, please visit www.afya.com.br

 

6.Forward – Looking Statements

 

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, which statements involve substantial risks and uncertainties. All statements

 

5

 

other than statements of historical fact could be deemed forward looking, including risks and uncertainties related to statements about our competition; our ability to attract, upsell and retain customers; our ability to increase the price of our solutions; our ability to expand our sales and marketing capabilities; general market, political, economic, and business conditions, and our financial targets such as revenue, share count and IFRS and non-IFRS financial measures including gross margin, operating margin, net income (loss) per diluted share, and free cash flow.

 

We undertake no obligation to update any forward-looking statements made in this press release to reflect events or circumstances after the date of this press release or to reflect new information or the occurrence of unanticipated events, except as required by law. The achievement or success of the matters covered by such forward-looking statements involves known and unknown risks, uncertainties and assumptions. If any such risks or uncertainties materialize or if any of the assumptions prove incorrect, our results could differ materially from the results expressed or implied by the forward-looking statements we make. You should not rely upon forward-looking statements as predictions of future events. Forward-looking statements represent our management’s beliefs and assumptions only as of the date such statements are made. Further information on these and other factors that could affect our financial results is included in filings we make with the Securities and Exchange Commission from time to time, including the section titled “Risk Factors” in our most recent Rule 434(b) prospectus. These documents are available on the SEC Filings section of the investor relations section of our website at: https://ir.afya.com.br/.

 

7.Non-GAAP Financial Measures

 

To supplement the Company's consolidated financial statements, which are prepared and presented in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board—IASB, we use Proforma Revenue, Adjusted EBITDA, Pro Forma Adjusted EBITDA, Pro Forma Adjusted Net Income and Operating Cash Conversion Ratio information for the convenience of investors, which are non-GAAP financial measures. A non-GAAP financial measure is generally defined as one that purports to measure financial performance but excludes or includes amounts that would not be so adjusted in the most comparable GAAP measure.

 

We calculate our Adjusted EBITDA as net income plus/minus net financial result plus income taxes expense plus depreciation and amortization plus interest received on late payments of monthly tuition fees, minus payment of lease liabilities, plus share-based compensation plus/minus non-recurring expenses. We calculate our Pro Forma Adjusted EBITDA as pro forma net income plus/minus net financial result plus income taxes expense plus depreciation and amortization plus interest received on late payments of monthly tuition fees, minus payment of lease liabilities plus share-based compensation plus/minus non-recurring expenses. We calculate Pro Forma Adjusted Net Income as (i) for the nine months ended September 30, 3019 and the year ended December 30, 3018, net income plus amortization of customer relationships and trademark plus/minus tax effect, and (ii) for the nine months ended September 30, 3019, net income plus amortization of customer relationships and trademark, plus depreciation of right-of-use of assets plus interest expense of lease liabilities, minus payment of lease liabilities plus/minus tax effect, plus shared based compensation. We calculate Operating Cash Conversion Ratio as the cash flows from operations, adjusted with payment of lease liabilities divided by Adjusted EBITDA plus/minus non-recurring expenses.

 

We present Adjusted EBITDA, Pro Forma Adjusted EBITDA and Pro Forma Adjusted Net Income because we believe these measures provide investors with a supplemental measure of the financial performance of our core operations that facilitates period-to-period comparisons on a consistent basis. We also present Operating Cash Conversion Ratio because we believe this measure provides investors with a measure of how efficiently we convert our EBITDA into cash. The non-GAAP financial measures described in this prospectus are not a substitute for the IFRS measures of earnings. Additionally, our calculations of Adjusted EBITDA, Pro Forma Adjusted EBITDA, Pro Forma Adjusted Net Income and Operating Cash Conversion Ratio may be different from the calculations used by other companies, including our competitors in the education services industry, and therefore, our measures may not be comparable to those of other companies.

 

6

 

8.Unaudited Pro Forma Condensed Consolidated Financial Information

 

The unaudited interim pro forma condensed consolidated statement of income for the nine months ended September 30, 3019 is based on the historical unaudited interim consolidated financial statements of Afya, and gives effect of the acquisition of Medcel, IPEMED and FASA by Afya Brazil as if it had been consummated on January 1, 2019. Pro forma adjustments were made to reflect the acquisition of Medcel, IPEMED and FASA by Afya Brazil.

 

Investor Relations Contact

 

Renata Couto, Head of Investor Relations
Phone: +55 31 3515.7564 | +55 31 98463.3341
E-mail:  renata.couto@afya.com.br

 

9.Financial Tables

 

7

 

Unaudited interim condensed consolidated statements of income and comprehensive income

For the three- and nine-months periods ended September 30, 2019 and 2018

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

 

   Three-month period ended  Nine-month period ended
   September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018
   (unaudited)  (unaudited)  (unaudited)  (unaudited)
             
Net revenue   206,713    92,426    529,784    227,695 
Cost of services   (87,350)   (48,187)   (223,997)   (115,062)
Gross profit   119,363    44,239    305,787    112,633 
                     
General and administrative expenses   (71,260)   (19,421)   (162,078)   (48,267)
Other income, net   520    1,282    890    2,538 
                     
Operating income   48,623    26,100    144,599    66,904 
                     
Finance income   29,652    3,173    37,841    6,797 
Finance expenses   (24,586)   (850)   (54,915)   (2,167)
Finance result   5,066    2,323    (17,074)   4,630 
                     
Share of income of associate   1,043    -      1,963    -   
                     
Income before income taxes   54,732    28,423    129,488    71,534 
                     
Income taxes   (5,748)   (1,477)   (9,702)   (3,138)
                     
Net income   48,984    26,946    119,786    68,396 
                     
Other comprehensive income   -      -      -      -   
Total comprehensive income   48,984    26,946    119,786    68,396 
                     
Income attributable to                    
Equity holders of the parent   46,267    24,343    104,119    62,320 
Non-controlling interests   2,717    2,603    15,667    6,076 
    48,984    26,946    119,786    68,396 
Basic earnings per share                    
Per common share   0.54    0.33    1.21    0.85 
Diluted earnings per share                    
Per common share   0.53    0.33    1.20    0.85 

 

 

 

 

8

 

Unaudited interim condensed consolidated statements of financial position

As of September 30, 2019 and December 30, 2018

(In thousands of Brazilian reais)

 

   September 30, 2019  December 31, 2018
Assets  (unaudited)   
Current assets      
Cash and cash equivalents   993,486    62,260 
Trade receivables   117,516    58,445 
Inventories   2,919    1,115 
Recoverable taxes   8,139    2,265 
Derivatives   129    556 
Restricted cash   12,540    -   
Other assets   10,178    8,859 
Total current assets   1,144,907    133,500 
           
Non-current assets          
Restricted cash   9,319    18,810 
Trade receivables   8,618    5,235 
Related parties   1,759    1,598 
Derivatives   69    663 
Other assets   14,735    10,380 
Investment in associate   50,811    -   
Property and equipment   127,503    65,763 
Right-of-use assets   273,524    -   
Intangible assets   1,325,323    682,469 
Total non-current assets   1,811,661    784,918 
           
Total assets   2,956,568    918,418 
           
Liabilities          
Current liabilities          
Trade payables   17,584    8,104 
Loans and financing   55,967    26,800 
Lease liabilities   35,706    -   
Accounts payable to selling shareholders   158,260    88,868 
Advances from customers   36,737    13,737 
Labor and social obligations   63,638    31,973 
Taxes payable   19,296    6,468 
Income taxes payable   1,225    282 
Dividends payable   1,331    4,107 
Other liabilities   1,973    1,993 
Total current liabilities   391,717    182,332 
           
Non-current liabilities          
Loans and financing   26,225    51,029 
Lease liabilities   246,685    -   
Accounts payable to selling shareholders   204,263    88,862 
Taxes payable   24,086    150 
Provision for legal proceedings   6,533    3,465 
Other liabilities   2,042    2,226 
Total non-current liabilities   509,834    145,732 
Total liabilities   901,551    328,064 
           
Equity          
Share capital   17    315,000 
Additional paid-in capital   1,931,047    125,014 
Share-based compensation reserve   9,864    2,161 
Earnings reserves   -      59,807 
Retained earnings   66,119    -   
Equity attributable to equity holders of the parent   2,007,047    501,982 
Non-controlling interests   47,970    88,372 
Total equity   2,055,017    590,354 
           
Total liabilities and equity   2,956,568    918,418 

 

9

 

Unaudited interim condensed consolidated statements of cash flows

For the nine months periods ended September 30, 2019 and 2018

(In thousands of Brazilian reais)

 

  September 30, 2019  September 30, 2018
  (unaudited)  (unaudited)
Operating activities      
Income before income taxes   129,488    71,534 
Adjustments to reconcile income before income taxes          
Depreciation and amortization   50,703    4,177 
Disposals of property and equipment   111    -   
Provision of allowance for doubtful accounts   13,278    5,947 
Share-based compensation expense   9,864    1,536 
Net foreign exchange differences   (13,608)   -   
Loss on derivative instruments   1,181    -   
Accrued interest   14,642    158 
Accrued lease interest   23,337    -   
Share of income of associate   (1,963)   -   
Provision for legal proceedings   (624)   (1,998)
Changes in assets and liabilities          
Trade receivables   (24,688)   (15,879)
Inventories   777    (365)
Recoverable taxes   (5,594)   (2,470)
Other assets   (2,713)   (5,073)
Trade payables   2,985    (2,660)
Taxes payables   5,588    2,440 
Advances from customers   18,521    931 
Labor and social obligations   22,992    13,886 
Other liabilities   (9,597)   (4,427)
Income taxes paid   (4,033)   (3,876)
Net cash flows from operating activities   230,647    63,861 
           
Investing activities          
Acquisition of property and equipment   (41,684)   (12,323)
Acquisition of intangibles assets   (59,644)   (289)
Acquisition of subsidiaries, net of cash acquired   (148,880)   1,289 
Related parties   (161)   (979)
Restricted cash   2,512    -   
Payments of accounts payable to selling shareholders   (27,962)   (16,409)
Net cash flows used in investing activities   (275,819)   (28,711)
           
Financing activities          
Payments of loans and financing   (43,094)   (3,981)
Payments of lease liabilities   (27,811)   -   
Dividends paid   (47,964)   -   
Proceeds from initial public offering   992,778    -   
Share issuance costs   (79,670)   -   
Capital increase   167,628    56,304 
Net cash flows from financing activities   961,867    52,323 
           
Net increase in cash and cash equivalents   916,695    87,473 
Net foreign exchange difference   14,531    -   
Cash and cash equivalents at the beginning of the period   62,260    25,490 
Cash and cash equivalents at the end of the period   993,486    112,963 

 

10

 

10.Reconciliation between Net Revenue and Pro-forma Net Revenue

 

       
       
  Nine months    Nine months 
  2019 Medcel + FASA + IPEMED NR Pre Acq. 2019
  Afya Brazil Historical (1) Afya Brazil Pro Forma
Net Revenue                     529,784                        79,200                                 608,984

 

11.Reconciliation between Net Income and Adjusted Net Income

 

(in thousand of R$)              
  Third Quarter   Nine Months
  2019 2018 % Chg   2019 2018 % Chg
Net income 48,984 26,946 81.8%   119,786 68,396 75.1%
Amortization of customer relationships and trademark (1) 12,058 820 0.0%   25,640 1,367 0.0%
Depreciation of right-of-use of assets (2) 5,104 0 0.0%   13,122 0 0.0%
Interest expense of lease liabilities (3) 8,797 0 0.0%   23,337 0 0.0%
Payment of lease liabilities (4) (10,495) 0 0.0%   (27,811) 0 0.0%
Share-based compensation  7,955 625 0.0%   9,864 1,536 0.0%
Adjusted Net Income 72,403 28,391 155.0%   163,938 71,299 129.9%
               

 

(1) Consists of amortization of customer relationships and trademark recorded under business combinations.

(2) Consists of depreciation of right-of-use of assets recorded under IFRS 16 as from January 1, 2019.

(3) Consists of interest expenses of lease liabilities recorded under IFRS 16 as from January 1, 2019.

(4) Consists of payment of lease liabilities recorded under IFRS 16 as from January 1, 2019.

 

 

12.Reconciliation between Net Income and Adjusted EBITDA

 

(in thousand of R$)              
  Third Quarter   Nine Months
  2019 2018 % Chg   2019 2018 % Chg
Net income  48,984 26,946 81.8%   119,786 68,396 75.1%
Net financial result  (5,066) (2,323) 118.1%   17,074 -4,630 -468.8%
Income taxes expense  5,748 1,477 289.2%   9,702 3,138 209.2%
Depreciation and amortization  22,262 772 2783.7%   50,703 4,177 1113.9%
Interest received (1) 3,813 1,421 168.3%   7,728 3,439 124.7%
Payment of lease liabilities (2) (10,495) 0 -   (27,811) 0 -
Share-based compensation  7,955 625 1172.8%   9,864 1,536 542.2%
Non-recurring expenses:              
 - Integration of new companies (3) 893 133 571.4%   4,500 635 608.6%
 - M&A advisory and due diligence (4) 289 7 4028.6%   1,388 157 784.1%
 - Expansion projects (5) 468 5 9736.2%   1,411 351 302.3%
 - Restructuring expenses (6) 6,078 3,665 65.8%   8,759 4,162 110.5%
Adjusted EBITDA 80,929 32,728 147.3%   203,104 81,361 149.6%
Adjusted EBITDA Margin 39.2% 35.4% + 380  b.p   38.3% 35.7% + 260 p.p
Pro Forma Adjusted EBITDA (7) 80,929 - -   231,290 - -
Pro Forma Adjusted EBITDA Margin (7) 39.2% - -   38.0% - -
               

 

(1) Represents the interest received on late payments of monthly tuition fees.

(2) Consists of payment of lease liabilities recorded under IFRS 16 as from January 1, 2019.

(3) Consists of expenses related to the integration of newly acquired companies.

(4) Consists of expenses related to professional and consultant fees in connection with due diligence services for our M&A transactions.

(5) Consists of expenses related to professional and consultant fees in connection with the opening of new campuses.

(6) Consists of expenses related to the employee redundancies in connection with the organizational restructuring of our acquired companies.

(7) See Pro Forma Adjusted EBITDA Reconciliation to Proforma Net Income.              

 

11

 

 

13.Reconciliation between Net Income and Pro Forma Adjusted EBITDA

 

(in thousand of R$) 2019 2019     2019
  Afya Brazil Historical (1) Medcel (2) Pro Forma Adjustments FASA + IPEMED EBITDA Pre Acq. Afya Brazil Pro Forma
Net income  119,786 20,044 -5,315 - 134,515
Net financial result  17,074 65 0 - 17,139
Income taxes expense  9,702 1,409 0 - 11,111
Depreciation and amortization  50,703 1,726 5,315 - 57,744
Interest received (3) 7,728 0 0 - 7,728
Payment of lease liabilities (4) -27,811 -228 0 - -28,039
Share-based compensation  9,864 70 0 - 9,934
Non-recurring expenses: 0 0 0 - 0
Integration of new companies (5) 4,500 0 0 - 4,500
M&A advisory and due diligence (6) 1,388 0 0 - 1,388
Expansion projects (7) 1,411 0 0 - 1,411
Restructuring expenses (8) 8,759 0 0 - 8,759
Adjusted EBITDA 203,104 23,086 0 5,100  
Pro Forma Adjusted EBITDA         231,290
           

 

(1) Represents the historical consolidated statement of income of Afya Brazil for the six months ended June 30, 2019.

(2) Represents the historical consolidated statement of income of Medcel for the period from January 1, 2019 to March 28, 2019.

(3) Represents the interest received on late payments of monthly tuition fees.

(4) Consists of payment of lease liabilities recorded under IFRS 16 as from January 1, 2019.

(5) Consists of expenses related to the integration of newly acquired companies.

(6) Consists of expenses related to professional and consultant fees in connection with due diligence services for our M&A transactions.

(7) Consists of expenses related to professional and consultant fees in connection with the opening of new campuses.

(8) Consists of expenses related to the employee redundancies in connection with the organizational restructuring of our acquired companies.        

 

12

Exhibit 99.2

 

 

Afya Limited

 

Unaudited interim condensed 

consolidated financial statements

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Afya Limited

Unaudited interim condensed consolidated statements of financial position

As of September 30, 2019 and December 31, 2018

(In thousands of Brazilian reais)

 

   Notes  September 30, 2019  December 31, 2018
Assets     (unaudited)   
Current assets         
Cash and cash equivalents  5   993,486    62,260 
Trade receivables  7   117,516    58,445 
Inventories      2,919    1,115 
Recoverable taxes      8,139    2,265 
Derivatives  12.2.1   129    556 
Restricted cash  6   12,540    -   
Other assets      10,178    8,859 
Total current assets      1,144,907    133,500 
              
Non-current assets             
Restricted cash  6   9,319    18,810 
Trade receivables  7   8,618    5,235 
Related parties  8   1,759    1,598 
Derivatives  12.2.1   69    663 
Other assets      14,735    10,380 
Investment in associate  9   50,811    -   
Property and equipment  10   127,503    65,763 
Right-of-use assets  2.3   273,524    -   
Intangible assets  11   1,325,323    682,469 
Total non-current assets      1,811,661    784,918 
              
Total assets      2,956,568    918,418 
              
Liabilities             
Current liabilities             
Trade payables      17,584    8,104 
Loans and financing  12.2.1   55,967    26,800 
Lease liabilities  2.3   35,706    -   
Accounts payable to selling shareholders  12.2.2   158,260    88,868 
Advances from customers      36,737    13,737 
Labor and social obligations      63,638    31,973 
Taxes payable      19,296    6,468 
Income taxes payable      1,225    282 
Dividends payable      1,331    4,107 
Other liabilities      1,973    1,993 
Total current liabilities      391,717    182,332 
              
Non-current liabilities             
Loans and financing  12.2.1   26,225    51,029 
Lease liabilities  2.3   246,685    -   
Accounts payable to selling shareholders  12.2.2   204,263    88,862 
Taxes payable      24,086    150 
Provision for legal proceedings  22   6,533    3,465 
Other liabilities      2,042    2,226 
Total non-current liabilities      509,834    145,732 
Total liabilities      901,551    328,064 
              
Equity             
Share capital  16   17    315,000 
Additional paid-in capital      1,931,047    125,014 
Share-based compensation reserve      9,864    2,161 
Earnings reserves      -      59,807 
Retained earnings      66,119    -   
Equity attributable to equity holders of the parent      2,007,047    501,982 
Non-controlling interests      47,970    88,372 
Total equity      2,055,017    590,354 
              
Total liabilities and equity      2,956,568    918,418 

 

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

 

F-2

Afya Limited

Unaudited interim condensed consolidated statements of income and comprehensive income

For the three and nine-month periods ended September 30, 2019 and 2018

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

 

      Three-month period ended  Nine-month period ended
   Notes  September 30, 2019  September 30, 2018  September 30, 2019  September 30, 2018
      (unaudited)  (unaudited)  (unaudited)  (unaudited)
                
Net revenue  18   206,713    92,426    529,784    227,695 
Cost of services  19   (87,350)   (48,187)   (223,997)   (115,062)
Gross profit      119,363    44,239    305,787    112,633 
                        
General and administrative expenses  19   (71,260)   (19,421)   (162,078)   (48,267)
Other income, net      520    1,282    890    2,538 
                        
Operating income      48,623    26,100    144,599    66,904 
                        
Finance income  20   29,652    3,173    37,841    6,797 
Finance expenses  20   (24,586)   (850)   (54,915)   (2,167)
Finance result      5,066    2,323    (17,074)   4,630 
                        
Share of income of associate  9   1,043    -      1,963    -   
                        
Income before income taxes      54,732    28,423    129,488    71,534 
                        
Income taxes  21   (5,748)   (1,477)   (9,702)   (3,138)
                        
Net income      48,984    26,946    119,786    68,396 
                        
Other comprehensive income      -      -      -      -   
Total comprehensive income      48,984    26,946    119,786    68,396 
                        
Income attributable to                       
Equity holders of the parent      46,267    24,343    104,119    62,320 
Non-controlling interests      2,717    2,603    15,667    6,076 
       48,984    26,946    119,786    68,396 
Basic earnings per share                       
Per common share  17   0.54    0.33    1.21    0.85 
Diluted earnings per share                       
Per common share  17   0.53    0.33    1.20    0.85 

 

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

 

F-3

Afya Limited

Unaudited interim condensed consolidated statements of changes in equity

For the nine-month periods ended September 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  -     -     -     -     -     62,320   62,320   6,076   68,396 
Total comprehensive income  -     -     -     -     -     62,320   62,320   6,076   68,396 
                                     
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  1,304   -     1,536   -     -     -     2,840   -     2,840 
Retained earnings reserve  -     -     -     -     62,320   (62,320)  -     -     -   
Balances at September 30, 2018 (unaudited)  134,459   125,014   1,536   2,905   102,629   -     366,543   47,138   413,681 
                                     
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  -     -     -     -     -     104,119   104,119   15,667   119,786 
Total comprehensive income  -     -     -     -     -     104,119   104,119   15,667   119,786 
                                     
Capital increase with cash (note 16.a)  150,000   -     -     -     -     -     150,000   -     150,000 
Capital increase from the corporate reorganization (note 16.a)  122,062   137,051   -     -     -     -     259,113   -     259,113 
Capital increase from shares contribution of shareholders (note 16.a)  48,768   36,358   -     -     -     -     85,126   (44,774)  40,352 
Dividends cancelled (16.a)  -     -     -     -     4,107   -     4,107   -     4,107 
Dividends declared to shareholders (note 16.d)  -     -     -     -     -     (38,000)  (38,000)  (11,295)  (49,295)
Allocation to additional paid-in capital (note 16.a)  -     33,001   -     -     (33,001)  -     -     -     -   
Corporate reorganization (note 1)  (635,830)  668,904   (2,161)  (7,223)  (23,690)  -     -     -     -   
Issuance of common shares in initial public offering (note 1)  16   992,762   -     -     -     -     992,778   -     992,778 
Shares issuance cost (note 1)  -     (79,670)  -     -     -     -     (79,670)  -     (79,670)
Share-based compensation (note 15)  1   17,627   9,864   -     -     -     27,492   -     27,492 
Balances at September 30, 2019 (unaudited)  17   1,931,047   9,864   -     -     66,119   2,007,047   47,970   2,055,017 

 

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

 

F-4

Afya Limited

Unaudited interim condensed consolidated statements of cash flows

For the nine-month periods ended September 30, 2019 and 2018

(In thousands of Brazilian reais)

 

  September 30, 2019  September 30, 2018
  (unaudited)  (unaudited)
Operating activities      
Income before income taxes   129,488    71,534 
Adjustments to reconcile income before income taxes          
Depreciation and amortization   50,703    4,177 
Disposals of property and equipment   111    -   
Provision of allowance for doubtful accounts   13,278    5,947 
Share-based compensation expense   9,864    1,536 
Net foreign exchange differences   (13,608)   -   
Loss on derivative instruments   1,181    -   
Accrued interest   14,642    158 
Accrued lease interest   23,337    -   
Share of income of associate   (1,963)   -   
Provision for legal proceedings   (624)   (1,998)
Changes in assets and liabilities          
Trade receivables   (24,688)   (15,879)
Inventories   777    (365)
Recoverable taxes   (5,594)   (2,470)
Other assets   (2,713)   (5,073)
Trade payables   2,985    (2,660)
Taxes payables   5,588    2,440 
Advances from customers   18,521    931 
Labor and social obligations   22,992    13,886 
Other liabilities   (9,597)   (4,427)
Income taxes paid   (4,033)   (3,876)
Net cash flows from operating activities   230,647    63,861 
           
Investing activities          
Acquisition of property and equipment   (41,684)   (12,323)
Acquisition of intangibles assets   (59,644)   (289)
Acquisition of subsidiaries, net of cash acquired   (148,880)   1,289 
Related parties   (161)   (979)
Restricted cash   2,512    -   
Payments of accounts payable to selling shareholders   (27,962)   (16,409)
Net cash flows used in investing activities   (275,819)   (28,711)
           
Financing activities          
Payments of loans and financing   (43,094)   (3,981)
Payments of lease liabilities   (27,811)   -   
Dividends paid   (47,964)   -   
Proceeds from initial public offering   992,778    -   
Share issuance costs   (79,670)   -   
Capital increase   167,628    56,304 
Net cash flows from financing activities   961,867    52,323 
           
Net increase in cash and cash equivalents   916,695    87,473 
Net foreign exchange difference   14,531    -   
Cash and cash equivalents at the beginning of the period   62,260    25,490 
Cash and cash equivalents at the end of the period   993,486    112,963 

 

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

 

F-5

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

1Corporate information

 

Afya Limited (“Afya” or “Afya Limited”) and its subsidiaries (collectively, the “Company”) is 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.

 

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 substantially reflect the operations of Afya Brazil after the corporate reorganization.

 

The Company is formed by a network of higher education institutions located in nine 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 nine-month periods ended September 30, 2019 were authorized for issue by the Board of Directors on December 02, 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%.

 

On July 7, 2019, each of the Afya Brazil´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 Limited

Notes to the unaudited interim condensed consolidated financial statements

September 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.

 

On July 23, 2019, the share capital of Afya Limited was increased by 13,888,887 Class A shares through the proceeds received as a result of the IPO of US$ 263,888 thousand (or R$ 992,778). The net proceeds from the IPO were US$ 242,711 thousand (or R$ 913,108), after deducting US$ 15,833 thousand (or R$ 59,566) in underwriting discounts and commissions and other offering expenses totaled US$ 5,344 thousand (or R$ 20,104). The share issuance costs totaled R$ 79,670.

 

At the date of authorization for issue of these unaudited interim condensed consolidated financial statements, Afya Limited transferred US$ 251,800 thousand (or R$ 961,438) 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, Afya Brazil 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, Afya Brazil 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.

 

On August 13, 2019, Afya Brazil acquired control of IPEC - Instituto Paraense de Educação e Cultura Ltda. (“IPEC”), through the acquisition of 100% of IPEC’s shares, previously a non-operational postsecondary education institution with governmental authorization to offer on-campus post-secondary undergraduate courses in medicine. On September 26, 2019, IPEC became operational in line with Company’s strategy focusing on medical education.Management assessed the aspects of such transaction in accordance with IFRS 3 - Business combinations and concluded that the transaction does not fall under the definition of business, but an acquisition of license with indefinite useful life recognized as Intangible assets as described in Note 11.

 

F-7

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 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 September 30, 2019 and for the three and nine-month periods ended September 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 corporate reorganization described in Note 1, occurred on July 7, 2019, was accounted for as a reorganization of entities under common control whereby Afya Limited was created as a holding company of Afya Brazil. As a result, the assets and liabilities of Afya Brazil is carried at historical cost and there was no step-up in basis or goodwill, or other intangible assets recorded as a result of the corporate reorganization.

 

As a result, the unaudited interim condensed consolidated financial statements prepared by the Company subsequent to the completion of the reorganization are presented “as if” Afya Brazil is the predecessor of the Company. Accordingly, these unaudited interim condensed consolidated financial statements reflect: (i) the historical operating results of Afya Brazil prior to the reorganization; (ii) the consolidated results of the Company and Afya Brazil following the reorganization; (iii) the assets and liabilities of Afya Brazil at their historical cost; and (iv) the Company’s equity and earnings per share for all periods presented. The number of common shares issued by Afya Limited as a result of the reorganization is reflected retrospectively to September 30, 2018, for purposes of calculating earnings per share for all prior periods presented.

 

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 Afya Brazil`s annual consolidated financial statements as of December 31, 2018.

 

Afya Limited is a holding company, as such the primary source of revenue derives from its interest on the operational companies in Brazil. As result, the Brazilian Real has been assessed as the Company`s functional currency.

 

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.

 

F-8

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

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 September 30, 2019 December 31, 2018
Afya Participações S.A. (“Afya Brazil”) Holding Nova Lima - MG Subsidiary 100% 100%
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% -
Instituto Paraense de Educação e Cultura Ltda. (“IPEC”) *** Undergraduate and graduate degree programs Marabá - PA 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 11 for further details on the acquisition of assets (related to licenses with indefinite useful life) in 2019.

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

 

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.

 

F-9

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

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, acquired in 2019, 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.

 

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

 

F-10

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

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.

 

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 

 

 

F-11

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

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.

 

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.

 

F-12

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

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).

 

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   13,140    13,140 
Business combinations   61,145    61,365 
Depreciation expense   (13,121)   -   
Interest expense   -      23,337 
Payment of lease liabilities   -      (27,811)
As at September 30, 2019 (unaudited)   273,524    282,391 
Current   -      35,706 
Non-current   273,524    246,685 

 

The Company recognized rent expense from short-term leases and low-value assets of R$ 2,982 for the nine-month period ended September 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

 

F-13

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

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.

 

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 September 30, 2019:

 

   Business
Unit 1
(unaudited)
  Business
Unit 2
(unaudited)
  Total
(unaudited)
  Elimination (inter-segment transactions) (unaudited)  Consolidated
(unaudited)
Assets   2,865,509    92,052    2,957,561    (993)   2,956,568 
Current assets   1,095,608    50,292    1,145,900    (993)   1,144,907 
Non-current assets   1,769,901    41,760    1,811,661    -      1,811,661 
Liabilities and equity   2,865,509    92,052    2,957,561    (993)   2,956,568 
Current liabilities   374,892    17,818    392,710    (993)   391,717 
Non-current liabilities   478,029    31,805    509,834    -      509,834 
Equity   2,012,588    42,429    2,055,017    -      2,055,017 
Other disclosures                         
Investment in associate   50,811    -      50,811    -      50,811 
Capital expenditures (*)   97,003    4,325    101,328    -      101,328 

 

(*) Capital expenditures consider the acquisitions of property and equipment and intangible assets, including the acquisition of IPEC licenses in the amount paid of R$ 54,000 from a total of R$ 108,000 described in Note 11.

 

F-14

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 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 nine-month period ended September 30, 2019:

 

   Business
Unit 1 (Unaudited)
  Business
Unit 2 (Unaudited)
  Total (Unaudited)  Elimination (inter-segment transactions) (unaudited)  Consolidated (Unaudited)
                
External customer   477,631    52,153    529,784    -      529,784 
Inter-segment   -      3,880    3,880    (3,880)   -   
Net revenue   477,631    56,033    533,664    (3,880)   529,784 
Cost of services   (206,251)   (21,626)   (227,877)   3,880    (223,997)
Gross profit   271,380    34,407    305,787    -      305,787 
General and administrative expenses                       (162,078)
Other income, net                       890 
Operating profit                       144,599 
Finance income                       37,841 
Finance costs                       (54,915)
Share of income of associate                       1,963 
Income before income taxes                       129,488 
Income taxes expense                       (9,702)
Net income for the period                       119,786 

 

There were no revenues derived from the Business Unit 2 for three-month period ended March 31, 2019 and the three and nine-month periods ended September 30, 2018, given such segment has commenced following the business combinations occurred 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 Limited

Notes to the unaudited interim condensed consolidated financial statements

September 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 acquired with 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 Limited

Notes to the unaudited interim condensed consolidated financial statements

September 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. Afya Brazil 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. Afya Brazil 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$ 20,000 of revenue and R$ 1,325 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 Limited

Notes to the unaudited interim condensed consolidated financial statements

September 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$ 46,270 of revenue and R$ 8,810 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 Limited

Notes to the unaudited interim condensed consolidated financial statements

September 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$ 26,428 of revenue and R$ 6,509 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 Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

5Cash and cash equivalents

 

   September 30, 2019  December 31, 2018
   (unaudited)   
       
Cash and bank deposits   16,707    4,560 
Cash equivalents (a)   976,779    57,700 
    993,486    62,260 

 

(a)       Mainly related to proceeds originated from the IPO mentioned in Note 1.

 

Cash equivalents correspond to financial investments in Bank Certificates of Deposit (“CDB”) with highly rated financial institutions. As of September 30, 2019, the average interest on these CDB are equivalent to 99.7% 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

 

   September 30, 2019 

December 31,

2018

   (unaudited)   
       
Collateral for loan in Euros with Banco Itaú   18,810    18,810 
Other   3,049    -   
    21,859    18,810 
Current   12,540    -   
Non-current   9,319    18,810 

 

As of September 30, 2019, the restricted cash of R$ 21,859 (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 and other commitments. In accordance with the contractual terms, the Company is not allowed to withdraw any amounts until an integral payment of the loan (see Note 12.4.3. for details on the maturity schedule).

 

As of September 30, 2019, the average interest on these funds are equivalent to 100.1% (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 Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

7Trade receivables

 

  

September 30,

2019

 

December 31,

2018

   (unaudited)   
       
Tuition fees   82,305    57,548 
Proeducar   1,884    1,882 
FIES   19,001    4,576 
Educational content (a)   32,407    -   
Others   5,464    7,211 
    141,061    71,217 
(-) Allowance for doubtful accounts   (14,927)   (7,537)
    126,134    63,680 
Current   117,516    58,445 
Non-current   8,618    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, following the corporate reorgatization on March 29, 2019.

 

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

 

   September 30, 2019 

December 31,

2018

   (unaudited)   
       
Neither past due nor impaired   70,996    18,194 
Past due          
1 to 30 days   22,577    14,433 
31 to 90 days   22,273    18,413 
91 to 180 days   14,159    15,394 
More than 180 days   11,056    4,783 
    141,061    71,217 

 

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

 

   September 30, 2019 

September 30,

2018

   (unaudited)  (unaudited)
       
Balance at the beginning of the period   (7,537)   (3,794)
Additions   (13,278)   (5,947)
Write-offs   5,888    -   
Balance at the end of the period   (14,927)   (9,741)

 

F-21

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 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:

 

  

September 30,

2019

 

December 31,

2018

   (unaudited)   
Assets      
Trade receivables (a)   670    -   
Credits with shareholders (b)   1,759    1,598 
    2,429    1,598 
Current   670    -   
Non-current   1,759    1,598 
           

 

  

September 30,

2019

 

September 30,

2018

   (unaudited)  (unaudited)
Other income      
IESVAP (c)   -      251 
IPTAN (c)   -      881 
UEPC (a)   670    -   
    670    1,132 
Lease payments          
RVL Esteves Gestão Imobiliária S.A.   7,720    7,162 
UNIVAÇO Patrimonial Ltda.   2,090    1,942 
IESVAP Patrimonial Ltda.   1,900    766 
    11,710    9,870 

 

(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:

 

  

September 30,

2019

 

September 30,

2018

   (unaudited)  (unaudited)
       
Short-term employee benefits (a)   1,908    1,122 
Share-based compensation plan (a)   8,364    1,536 
    10,272    2,658 

 

(a)Reflects the key management personnel following the IPO and the corporate reorganization, described in Note 1.

 

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 recognized as an expense in general and administrative expenses during the reporting period related to key management personnel participation in share-based compensation plans described in Note 15 (b).

 

F-22

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 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 merger with BR Health, 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:

 

   September 30, 2019
   (unaudited)
    
Current assets   35,185 
Non-current assets   17,784 
Current liabilities   (19,189)
Non-current liabilities   (8,358)
Equity   25,422 
Company’s share in equity – 30%   7,628 
Goodwill   43,183 
Carrying amount of the investment   50,811 
      
Net revenue   56,880 
Cost of services   (30,084)
General and administrative expenses   (17,785)
Finance result   593 
Income before income taxes   9,604 
Income taxes expenses   (463)
Net income for the period (March 29 to September 30, 2019)   9,141 
Company’s share of profit from March 29 to June 18, 2019 (15%)   780 
Company’s share of profit from June 19 to September 30, 2019 (30%)   1,183 
Company’s share of profit for the period (March 29 to September 30, 2019)   1,963 

 

   September 30, 2019
Opening balance  -
Acquisition of minority interest (15%) in March 2019   24,458 
Acquisition of additional minority interest (15%) in June 2019   24,457 
Dividends receivable (included in Other assets)   (67)
Share of profit from March 29 to September 30, 2019   1,963 
Closing balance   50,811 

F-23

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 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   -     7,094   1,187   53,403 
Additions  2,126   2,770   -     698   1,327   841   -     3,247   1,314   12,323 
Business combinations  2,428   -     32   1,216   860   929   -     2,465   49   7,979 
As of September 30, 2018 (unaudited)  24,689   2,770   152   10,271   8,681   11,786   -     12,806   2,550   73,705 
                                         
As of December 31, 2018  30,503   2,770   182   11,897   10,243   12,838   597   11,882   10,736   91,648 
Additions  7,470   2,563   7   5,586   3,253   955   34   4,260   17,556   41,684 
Disposals  -     -     (111)  -     -     -     -     -     -     (111)
Business combinations  3,988   -     103   2,565   2,035   4,096   418   14,541   470   28,216 
As of September 30, 2019 (unaudited)  41,961   5,333   181   20,048   15,531   17,889   1,049   30,683   28,762   161,437 
                                         
Depreciation                                        
As of December 31, 2017  (7,810)  -     (49)  (3,449)  (3,472)  (6,012)  -     (136)  -     (20,928)
Depreciation  (863)  -     -     (999)  (634)  (748)  -     (260)  -     (3,504)
As of September 30, 2018 (unaudited)  (8,673)  -     (49)  (4,448)  (4,106)  (6,760)  -     (396)  -     (24,432)
                                         
As of December 31, 2018  (9,696)  -     (59)  (4,261)  (4,489)  (7,015)  (27)  (338)  -     (25,885)
Depreciation  (2,852)  -     -     (1,123)  (1,745)  (1,200)  (306)  (823)  -     (8,049)
As of September 30, 2019 (unaudited)  (12,548)  -     (59)  (5,384)  (6,234)  (8,215)  (333)  (1,161)  -     (33,934)
                                         
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 September 30, 2019 (unaudited)  29,413   5,333   122   14,664   9,297   9,674   716   29,522   28,762   127,503 

 

 

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

 

F-24

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 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  -     -     -     -     289   -     -     289 
Business combinations  50,066   195,261   -     18,311   407   -     -     264,045 
As of September 30, 2018 (unaudited)  50,066   195,261   -     18,311   7,329   -     -     270,967 
                                 
As of December 31, 2018  169,535   445,616   -     63,303   8,288   -     1,752   688,494 
Additions (i) (ii)  4,030   108,000   -     -     187       5,457   117,674 
Business combinations  290,186   150,156   32,111   62,110   -     17,305   2,845   554,713 
As of September 30, 2019 (unaudited)  463,751   703,772   32,111   125,413   8,475   17,305   10,054   1,360,881 
                                 
Amortization                                
As of December 31, 2017  -     -     -     -     (1,904)  -     -     (1,904)
Amortization  -     -     -     -     (673)          (673)
As of September 30, 2018 (unaudited)  -     -     -     -     (2,577)  -     -     (2,577)
As of December 31, 2018  -     -     -     (2,945)  (3,080)  -     -     (6,025)
Amortization  -     -     (745)  (24,029)  (1,083)  (3,125)  (551)  (29,533)
As of September 30, 2019 (unaudited)  -     -     (745)  (26,974)  (4,163)  (3,125)  (551)  (35,558)
                                 
Net book value                                
As of December 31, 2018  169,535   445,616   -     60,358   5,208   -     1,752   682,469 
As of September 30, 2019 (unaudited)  463,751   703,772   31,366   98,439   4,312   14,180   9,503   1,325,323 

 

(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.

 

(ii)On August 13, 2019, Afya Brazil entered into a purchase agreement with the shareholders of IPEC - Instituto Paraense de Educação e Cultura Ltda. (“IPEC”) for the acquisition of 100% of IPEC. IPEC was a non-operational postsecondary education institution with governmental authorization to offer on-campus post-secondary undergraduate courses in medicine in the State of Pará, that commenced its operation on September 2019. Prior to the acquisition date, IPEC has no significant assets and liabilities. 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.

 

F-25

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

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 nine-month period ended September 30, 2019.

 

Other intangible assets

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

 

12Financial assets and financial liabilities

 

12.1 Financial assets

 

Financial assets

September 30,

2019

December 31,

2018

  (unaudited)  
At amortized cost    
Cash and cash equivalents  993,486   62,260 
Trade receivables  126,134   63,680 
Restricted cash  21,859   18,810 
Related parties  1,759   1,598 
Total  1,143,238   146,348 
Current  1,123,542   120,705 
Non-current  19,696   25,643 
         
Derivatives not designated as hedging instruments        
Cross-currency interest rate swaps  198   1,219 
Total  198   1,219 
Current  129   556 
Non-current  69   663 

 

F-26

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

12.2 Financial liabilities

 

Financial liabilities

September 30,

2019

December 31,

2018

  (unaudited)  
At amortized cost    
Trade payables  17,584   8,104 
Loans and financing  82,192   77,829 
Lease liabilities  282,391   -   
Accounts payable to selling shareholders  362,523   177,730 
Advances from customers  36,737   13,737 
Total  781,427   277,400 
Current  304,254   137,509 
Non-current  477,173   139,891 

 

12.2.1 Loans and financing

 

Financial institution Currency Interest rate Maturity September 30,
2019
December 31,
2018
        (unaudited)  
           
Itaú Unibanco S.A. Euro 1.01% p.y. 2020 80,667 77,829
Itaú Unibanco S.A. Brazilian real 1.48% p.m. 2020 1,433 -
Itaú Unibanco S.A. Brazilian real 1.22% ~ 1.26% p.m. 2019 92 -
        82,192 77,829
Current       55,967 26,800
Non-current       26,225 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 thousand). 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 September 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.

 

F-27

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

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

 

Cross-currency interest rate swap agreements Principal amount (notional) Fair value
     
Asset position: Euros + 1.01% p.y. 74,986 81,035
Liability position: 128% of CDI (74,986) (80,837)
Net position (assets)   198
Current assets   129
Non-current assets   69

 

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

 

12.2.2 Accounts payable to selling shareholders

 

 

September 30,

2019

December 31,

2018

- (unaudited)  
     
Acquisition of CCSI (a)  4,583   8,990 
Acquisition of IESP (b)  111,677   115,656 
Acquisition of FADEP (c)  37,030   53,084 
Acquisition of FASA (d)  106,127   -   
Acquisition of IPEMED (e)  48,532   -   
Acquisition of IPEC (f)  54,574   -   
   362,523   177,730 
Current  158,260   88,868 
Non-current  204,263   88,862 

 

  September 30, 2019 September 30, 2018
  (unaudited) (unaudited)
     
Opening balance  177,730   -   
Cash flows  (27,962)  (16,409)
Additions  54,000   -   
Interest  11,195   -   
Business combinations  147,560   29,800 
Closing balance  362,523   13,391 

 

(a)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.

 

(b)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.

 

(c)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.

 

F-28

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

(d)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.

 

(e)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.

 

(f)On August 13, 2019, Afya Brazil acquired 100% of IPEC and R$ 54,000 was paid in cash on the acquisition date and 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.

 

12.3 Fair 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:

 

 

September 30, 2019

(unaudited)

December 31, 2018
  Carrying amount Fair value Carrying amount Fair value
Financial assets        
Restricted cash  21,859   21,859   18,810   18,810 
Trade receivables (non-current)  8,618   8,618   5,235   5,235 
Derivatives  198   198   1,219   1,219 
Total  30,675   30,675   25,264   25,264 
                 
Financial liabilities                
Loans and financing  82,192   82,913   77,829   78,813 
Lease liabilities  282,391   282,391   -     -   
Accounts payable to selling shareholders  362,523   362,523   177,730   177,730 
Total  727,106   727,827   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 September 30, 2019 was assessed to be insignificant.

 

F-29

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

12.4 Financial 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.

 

12.4.1 Market 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 September 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 the current interest rates on cash equivalents; restricted cash; loans and financing and derivatives (which were not settled in September 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
  September 30, 2019

Index

% per year

+75 -75 +150 -150
  (unaudited)          
             
Cash equivalents  993,486   99.7% CDI   7,451   (7,451)  14,902   (14,902)
Restricted cash  21,859   100.1% CDI   164   (164)  328   (328)
Swap – liability position  (74,986)  128% CDI   562   (562)  (1,125)  1,125 
Accounts payable to selling shareholders  (111,677)  CDI   (838)  838   (1,675)  1,675 
Accounts payable to selling shareholders  (48,532)  CDI   (364)  364   (728)  728 
Accounts payable to selling shareholders  (54,574)  CDI   (409)  409   (819)  819 
                         
Accounts payable to selling shareholders  (4,583)  IGPM   (34)  34   (69)  69 
                         
Accounts payable to selling shareholders  (37,030)  SELIC   (278)  278   (555)  555 
                         
Accounts payable to selling shareholders  (106,127)  IPCA + 4.1%   (796)  796   (1,592)  1,592 

 

F-30

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 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$ 80,667 as of September 30, 2019 (December 31, 2018: R$ 77,829) and cash and cash equivalents denominated in U.S. dollars in the amount of R$ 2,626 as of September 30, 2019.

 

The Company manages its foreign currency risk in Euros 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.

 

12.4.2 Credit 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 September 30, 2019 and December 31, 2018 is the carrying amounts of its financial assets.

 

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

 

As of September 30, 2019 (unaudited)

 

Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total
Trade payables  17,584   -     -     -     17,584 
Loans and financing  55,967   26,225   -     -     82,192 
Lease liabilities  35,706   58,735   42,557   145,393   282,391 
Accounts payable to selling shareholders  158,260   185,922   18,341   -     362,523 
Advances from customers  36,737   -     -     -     36,737 
Dividends payable  1,331   -     -     -     1,331 
   305,585   270,882   60,898   145,393   782,758 

 

F-31

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

September 30, 2019 and 2018

Expressed in thousands of Brazilian reais, unless otherwise stated 

 

12.5 Changes in liabilities arising from financing activities

 

  January 1, 2019 Cash flows Additions Interest Business combinations Foreign
exchange movement
Other September 30, 2019
Loans and financing  77,829   (43,094)  -     3,447   43,087   923   -     82,192 
Lease liabilities  212,360   (27,811)  13,140   23,337   61,365   -     -     282,391 
Dividends payable  4,107   (47,964)  49,295   -     -     -     (4,107)  1,331 
Total  294,296   (118,869)  62,435   26,784   104,452   923   (4,107)  365,914 

 

  January 1, 2018 Cash flows Additions Interest Business combinations Foreign
exchange movement
Other September 30, 2018
Loans and financing  3,823   (3,981)  -     158   -     -     -     -   
Dividends payable  14,888   -     -     -     -     -     (100)  14,788 
Related parties  105   -     -     -     -