UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 6-K

 

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

 

For the month of August, 2020

 

 Commission File Number: 001-38992

 

Afya Limited

(Exact name of registrant as specified in its charter)

 

Alameda Oscar Niemeyer, No. 119, Salas 502, 504, 1,501 and 1,503

Vila da Serra, Nova Lima, Minas Gerais

Brazil

+55 (31) 3515 7550

(Address of principal executive office)

 

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

 

Form 20-F

X

  Form 40-F  

 

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

 

Yes     No

X

 

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

 

Yes     No

X

 

 

 

 

 


 

TABLE OF CONTENTS

 

EXHIBIT  
99.1 Unaudited interim condensed consolidated financial statements June 30, 2020
99.2 Afya Limited Announces Second Quarter and First Half 2020 Financial Results

 

 

 

SIGNATURE

 

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

 

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

Date: August 27, 2020

 

 

 

 

 

 

 

Afya Limited

 

 

Unaudited interim condensed

consolidated financial statements

 

June 30, 2020

 

 
 

Afya Limited

Unaudited interim condensed consolidated statements of financial position

As of June 30, 2020 and December 31, 2019

(In thousands of Brazilian reais)

 

  Notes   June 30, 2020   December 31, 2019
Assets     (unaudited)    
Current assets          
Cash and cash equivalents 5   1,041,462   943,209
Restricted cash 6   10,902   14,788
Trade receivables 7   238,874   125,439
Inventories     5,375   3,932
Recoverable taxes     18,774   6,485
Derivatives 12.2.1   8,720   -
Other assets     14,108   17,912
Total current assets     1,338,215   1,111,765
           
Non-current assets          
Restricted cash 6   2,053   2,053
Trade receivables 7   13,611   9,801
Other assets     41,240   17,267
Investment in associate 9   50,539   45,634
Property and equipment 10   192,686   139,320
Right-of-use assets 12.2.2   376,023   274,275
Intangible assets 11   1,835,823   1,312,338
Total non-current assets     2,511,975   1,800,688
           
Total assets     3,850,190   2,912,453
           
Liabilities          
Current liabilities          
Trade payables     23,234   17,628
Loans and financing 12.2.1   42,094   53,607
Derivatives 12.2.1   -   757
Lease liabilities 12.2.2   46,920   22,693
Accounts payable to selling shareholders 12.2.3   149,879   131,883
Notes payable 12.2.4   9,322   -
Advances from customers     40,621   36,860
Labor and social obligations     98,916   46,770
Taxes payable     32,483   19,442
Income taxes payable     4,395   3,213
Other liabilities     14,662   376
Total current liabilities     462,526   333,229
           
Non-current liabilities          
Loans and financing 12.2.1   19,308   6,750
Lease liabilities 12.2.2   347,320   261,822
Accounts payable to selling shareholders 12.2.3   245,567   168,354
Notes payable 12.2.4   69,115   -
Taxes payable     23,924   21,304
Provision for legal proceedings 22   19,807   5,269
Other liabilities     3,048   1,999
Total non-current liabilities     728,089   465,498
Total liabilities     1,190,615   798,727
           
Equity          
Share capital 16   17   17
Additional paid-in capital     2,300,513   1,931,047
Share-based compensation reserve     32,711   18,114
Retained earnings     276,411   115,916
Equity attributable to equity holders of the parent     2,609,652   2,065,094
Non-controlling interests     49,923   48,632
Total equity     2,659,575   2,113,726
           
Total liabilities and equity     3,850,190   2,912,453

 

 

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 six-month periods ended June 30, 2020 and 2019

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

 

 

      Three-month period ended   Six-month period ended
  Notes   June 30, 2020   June 30, 2019   June 30, 2020   June 30, 2019
      (unaudited)   (unaudited)   (unaudited)   (unaudited)
                   
Net revenue 18    274,211   178,493   546,515   323,071
Cost of services 19    (106,683)   (82,283)   (195,934)   (136,647)
Gross profit     167,528   96,210   350,581   186,424
                   
General and administrative expenses 19   (90,039)   (59,584)   (176,762)   (90,818)
Other (expenses) income, net     (689)   576   (748)   370
                   
Operating income     76,800   37,202   173,071   95,976
                   
Finance income 20   13,954   4,650   42,780   9,817
Finance expenses 20   (23,130)   (19,721)   (40,802)   (31,957)
Finance result     (9,176)   (15,071)   1,978   (22,140)
                   
Share of income of associate 9   2,603   920   4,905   920
                   
Income before income taxes     70,227   23,051   179,954   74,756
                   
Income taxes expense 21   (6,341)   (1,725)   (12,398)   (3,954)
                   
Net income   63,886   21,326   167,556   70,802
                   
Other comprehensive income     -   -   -   -
Total comprehensive income     63,886   21,326   167,556   70,802
                   
Income attributable to                  
Equity holders of the parent     60,679   16,317   160,495   57,852
Non-controlling interests     3,207   5,009   7,061   12,950
      63,886   21,326   167,556   70,802
Basic earnings per share                  
Per common share 17   0.65   0.23   1.74   0.91

Diluted earnings per share

Per common share

17   0.65   0.23   1.73   0.89
                   

 

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 six-month periods ended June 30, 2020 and 2019

(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, 2018   315,000 125,014 2,161 7,223 52,584 - 501,982 88,372 590,354
Net income   - - - - - 57,852 57,852 12,950 70,802
Total comprehensive income   - - - - - 57,852 57,852 12,950 70,802
                     
Capital increase with cash   150,000 - - - - - 150,000 - 150,000
Capital increase from corporate reorganization   122,062 137,051 - - - - 259,113 - 259,113
Capital increase from shares contribution of shareholders   48,768 36,358 - - - - 85,126 (44,774) 40,352
Share-based compensation   - - 1,909 - - - 1,909 - 1,909
Dividends cancelled   - - - - - 4,107 4,107 - 4,107
Dividends declared to shareholders   - - - - - (38,000) (38,000) (8,952) (46,952)
Allocation to additional paid-in capital   - 33,001 - - (33,001) - - - -
Balances at June 30, 2019 (unaudited)   635,830 331,424 4,070 7,223 19,583 23,959 1,022,089 47,596 1,069,685
                     
Balances at December 31, 2019   17 1,931,047 18,114 - - 115,916 2,065,094 48,632 2,113,726
Net income   - - - - - 160,495 160,495 7,061 167,556
Total comprehensive income   - - - - - 160,495 160,495 7,061 167,556
                     
Issuance of common shares   - 389,170 - - - - 389,170 - 389,170
Shares issuance cost   - (19,704) - - - - (19,704) - (19,704)
Share-based compensation   - - 14,597 - - - 14,597 - 14,597
Dividends declared to non-controlling interests   - - - - - - - (5,770) (5,770)
Balances at June 30, 2020 (unaudited)   17 2,300,513 32,711 - - 276,411 2,609,652 49,923 2,659,575
                       

  

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 six-month periods ended June 30, 2019 and 2018

(In thousands of Brazilian reais)

 

  June 30, 2020   June 30, 2019
  (unaudited)   (unaudited)
Operating activities      
  Income before income taxes 179,954   74,756
    Adjustments to reconcile income before income taxes      
      Depreciation and amortization 51,330   28,441
      Allowance for doubtful accounts 13,953   8,606
      Share-based compensation expense 14,597   1,909
      Net foreign exchange differences (14)   (1,858)
      Net (gain) loss on derivatives (19,430)   2,809
      Accrued interest 11,017   9,873
      Accrued lease interest 20,428   14,540
      Share of income of associate (4,905)   (920)
      Provision for legal proceedings 1,183   (347)
Changes in assets and liabilities      
  Trade receivables (104,831)   (28,624)
  Inventories (976)   884
  Recoverable taxes (11,464)   (2,827)
  Other assets 2,940   (15,758)
  Trade payables 996   5,257
  Taxes payables 10,214   1,139
  Advances from customers (13,317)   1,428
  Labor and social obligations 39,605   13,352
  Other liabilities 10,534   (1,458)
    201,814   111,202
  Income taxes paid (12,397)   (2,392)
  Net cash flows from operating activities 189,417   108,810
         
Investing activities      
  Acquisition of property and equipment (37,583)   (20,674)
  Acquisition of intangibles assets (7,766)   (718)
  Restricted cash 3,870   (1,153)
  Payments of accounts payable to selling shareholders (67,304)   (30,674)
  Payments of notes payable (1,611)   -
  Acquisition of subsidiaries, net of cash acquired (240,631)   (148,880)
  Loans to related parties -   (1,695)
  Net cash flows used in investing activities (351,025)   (203,794)
       
Financing activities      
  Payments of loans and financing (99,096)   (23,868)
  Issuance of loans and financing 911   -
  Payments of lease liabilities (25,538)   (17,316)
  Capital increase -   150,000
  Proceeds from issuance of common shares 389,170   -
  Shares issuance cost (19,704)   -
  Dividends paid to non-controlling interests (5,770)   (7,621)
  Net cash flows from financing activities 239,973   101,195
  Net foreign exchange differences 19,888   -
  Net increase in cash and cash equivalents 78,365   6,211
  Cash and cash equivalents at the beginning of the period 943,209   62,260
  Cash and cash equivalents at the end of the period 1,041,462   68,471

 

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

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

1Corporate information

 

Afya Limited (“Afya”), collectively with its subsidiaries referred to as 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, in July 2019, 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 14 Brazilian states forming the largest educational group with focus in medicine in the country and comprises the development and sale of electronically distributed educational courses on medicine science and related printed and technological educational content.

 

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 controlled Guardaya Empreendimentos and Participações S.A. (“Guardaya”) and was one of Afya Brazil’s shareholders; and (ii) Guardaya which owned 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 Afya Brazil´s shareholders had agreed to contribute their respective shares on Afya Brazil to Afya Limited, exchanging one common share into 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

June 30, 2020 and 2019

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.

 

 

Issuance of additional common shares

 

On February 6, 2020, Afya completed its follow-on public offering of 3,019,928 Class A common shares offered by the Company and 9,406,812 Class A common shares offered by the selling shareholders.

 

The offering price was US$ 27.50 per Class A common shares and gross proceeds of R$ 358,286 (US$ 83,048 thousand). The Company received net proceeds of R$ 339,648 (US$ 78,846 thousand), after deducting R$ 18,638 (US$ 4,202 thousand) in underwriting discounts, commissions and other offering expenses.

 

On March 10, 2020, the underwriters exercised their option to acquire additional 240,552 Class A common shares at the offering price, resulting in gross proceeds of R$ 30,884 (US$ 6,615 thousand). The net proceeds from the additional shares were R$ 29,819 (US$ 6,387 thousand), after deducting R$ 1,066 (U$ 228 thousand) in underwriting discounts and commissions.

 

Afya transferred R$ 294,312 (US$ 68,060 thousand) of the net proceeds to bank accounts in Brazil with an increase in the capital of Afya Brazil. These deposits were invested in first-line financial institutions in Brazil and are denominated in Brazilian reais.

 

Acquisitions in 2020

 

On January 31, 2020, Afya Brazil acquired control of Sociedade Universitária Redentor S.A. ("UniRedentor"), through the acquisition of 100% of its shares. UniRedentor is a post-secondary education institution with governmental authorization to offer on-campus, undergraduate degrees and graduate programs in medicine and health, as well as other courses, in the State of Rio de Janeiro. UniRedentor is in line with the Company’s strategy to focus on medical education. See Note 4.

 

On May 5, 2020, Afya Brazil acquired control of Centro Universitário São Lucas Ltda. (“UniSL”), through the acquisition of 100% of its shares. UniSL is a post-secondary education institution with governmental authorization to offer on-campus, undergraduate courses in medicine in the State of Rondônia. UniSL is in line with the Company’s strategy to focus on medical education. See Note 4.

 

F-7 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

 

On July 20, 2020, Afya Brazil acquired 100% share of PEBMED Instituição de Pesquisa Médica e Serviços Tecnológicos da Área da Saúde S.A. (“PEBMED”). PEBMED offers digital content to better support clinical decision aiming a better performance of the healthcare professional. See Note 24.

 

COVID-19

 

In December 2019, a novel strain of coronavirus (COVID-19) was reported to have emerged in Wuhan, China. COVID-19 has since spread to most of the countries around the globe, including every state in Brazil. On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and on March 20, 2020 the Brazilian federal government declared a national emergency with respect to COVID-19.

 

Since March 17, 2020, there has been an interruption of our on-campus activities due to Brazilian government authorities mandatory lockdowns. We managed to rapidly adapt our business to these unusual times, and although there has been an interruption of our on-campus activities, we are offering our educational activities to our students through our online platform (rather than on-site). Regarding the offering of practical classes, we quickly resumed our in-hospital and health care residency programs for fifth and sixth year students, which represents the largest portion of our practical curriculum. Some of our practical educational activities (particularly for students in the first to fourth years) that we were planning to provide in our on-campus labs and clinics remain suspended as of June 30, 2020 as a result of the COVID-19 pandemic.

 

Accordingly, we assessed whether we had satisfied all of our contracts with customers performance obligations, in accordance with IFRS 15, and concluded that was necessary to defer a portion of the net revenue in the second quarter of 2020. We recorded deferred revenues of R$14,465 by June 30, 2020, which were recorded in advances from customers in the statement of financial position as of June 30, 2020, as disclosed in Note 18.

 

By June 30, 2020, the States of Rio de Janeiro and Pará had issued state decrees granting discounts to our students, and we consequently have granted mandatory discounts to our students totaling R$345 in the State of Rio de Janeiro and R$263 in the State of Pará. As of the date of these interim financial statements, these mandatory discounts have been suspended as their constitutionality has been challenged in the superior courts. The State of Bahia also issued local regulation on August 13, 2020 granting discounts to our students. We are still evaluating the legal responses and measuring the possible impacts in our future financial statements.

 

As we continue to offer non-practical educational activities to our students through our platform and practical activities for fifth and sixth year students, through the same professors, staff and suppliers, we continue to charge our standard monthly tuitions fees. We are committed to delivering the best quality service, minimize the impacts of the COVID-19 pandemic on our students, employees and our local communities. In addition, as of the date of these interim financial statements, the COVID-19 pandemic has had no significant impact on the payment default rates of our students. We continue to support our students by providing special payment arrangements for families impacted by the COVID-19 pandemic. Furthermore, there have been no significant impacts on our financial performance and position of assets and there have been no significant changes in our financial condition triggering impairment indicators in these interim financial statements.

 

F-8 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

 

The COVID-19 pandemic is still evolving, and Brazilian authorities may maintain a lockdown of our on-campus activities for a longer or undefined extended of period of time or impose a more severe lockdown, among other measures, all of which are outside of our control and may materially adversely affect our business and results of operations including the resumption of on-campus practical classes in 2020. We may also suffer labor shortages, particularly of our teaching faculty, which is mostly comprised of doctors that continue to have work shifts at hospitals and are consequently more exposed to COVID-19 than non-medical administrative staff. Furthermore, the COVID-19 pandemic is expect to cause a material and adverse effect on the general economic, financial, political, demographic and business conditions in Brazil, which may reduce the disposable income of our students and their families, and consequently (i) result in an adverse impact on the ability of our students (current and/or prospective) to pay our tuition fees and/or (ii) trigger an increase in our attrition rates.

 

While we are aware of the uncertainties created by the COVID-19 pandemic, we remain confident in our strategy, in the financial robustness of our business and in our contribution of high quality medical professionals who we believe will help our society overcome the COVID-19 pandemic and other future challenges.

 

2Significant accounting policies

 

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

 

The unaudited interim condensed consolidated financial statements as of June 30, 2020 and for the three-month and six-month periods ended June 30, 2020 and 2019 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 was 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.

 

F-9 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

The unaudited interim condensed consolidated financial statements do not include all the information and disclosures required in the annual financial statements and should be read in conjunction with the Company’s annual consolidated financial statements as of December 31, 2019.

 

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.

 

These unaudited interim condensed consolidated financial statements for the six-month period ended June 30, 2020 were authorized for issue by the Board of Directors on August 27, 2020.

 

2.2Changes 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 annual consolidated financial statements for the year ended December 31, 2019. The Company has not early adopted any standard, interpretation or amendment that has been issued but is not yet effective.

 

Several amendments and interpretations apply for the first time in 2020, which include Amendments to IFRS 3: Definition of a Business; Amendments to IFRS 7, IFRS 9 and IAS 39: Interest Rate Benchmark Reform; and Amendments to IAS 1 and IAS 8: Definition of Material; and Conceptual Framework for Financial Reporting issued on March 29, 2018, but did not have a material impact on the Company’s unaudited interim condensed consolidated financial statements.

 

2.3Basis consolidation

 

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

 

        Direct and indirect interest
Name Principal activities Location Investment type June 30, 2020 December 31, 2019
Afya Participações S.A. (Afya Brazil) Holding Nova Lima - MG Subsidiary 100% 100%
Instituto Tocantinense Presidente Antônio Carlos Porto S.A. – (“ITPAC Porto”) 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% 100%
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% 100%
RD Administração e Participações Ltda. (“RD”) 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% 100%
Instituto Educacional Santo Agostinho S.A. (“FASA”) Undergraduate and graduate degree programs Montes Claros - MG Subsidiary 100% 100%
F-10 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

ESMC Educação Superior Ltda.* 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% 100%
União Educacional do Planalto Central S.A. (“UEPC”) Undergraduate and graduate degree programs Brasília - DF Associate 30% 30%
Instituto Paraense de Educação e Cultura Ltda (“IPEC”) Undergraduate and graduate degree programs Marabá - PA Subsidiary 100% 100%
Sociedade Universitária Redentor S.A. (“UniRedentor”) ** Undergraduate and graduate degree programs Itaperuna - RJ Subsidiary 100% -
Centro Universitário São Lucas Ltda. (“UniSL”) ** Undergraduate and graduate degree programs Porto Velho - RO Subsidiary 100% -

 

 

 

*       On January 1, 2020, Afya Brazil incorporated ESMC Educação Superior Ltda. (“ESMC”) and transferred the two FASA campuses located in the State of Minas Gerais, which do not offer medicine courses, to ESMC. This spin-off did not have an impact on the consolidated financial statements.

**       See Note 4 for further details on the business combinations during 2020.

***       CBBW was merged by Medcel on May 1, 2020.

 

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

 

The Company consolidates the financial information for all entities it controls. Control is achieved when the Company is exposed to, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee. Consolidation of a subsidiary begins when the Company obtains control over the subsidiary and it ceases when the Company loses control of the subsidiary. Assets, liabilities, income and expenses of a subsidiary acquired or disposed of during the year are included in the consolidated financial statements from the date the Company gains control until the date the Company ceases to control the subsidiary.

 

When necessary, adjustments are made to the financial statements of subsidiaries in order to bring their accounting policies in line with the Company’s accounting policies. All intra-group assets and liabilities, equity, income, expenses and cash flows relating to transactions are eliminated in full on consolidation.

 

A change in the ownership interest of a subsidiary, without a loss of control, is accounted for as an equity transaction. If the Company loses control over a subsidiary, it derecognizes the related assets (including goodwill), liabilities, non-controlling interest and other components of equity, while any resulting gain or loss is recognized in the statement of income.

 

Non-controlling interests in the results and equity of subsidiaries are shown separately in the consolidated statements of financial position, consolidated statements of income and comprehensive income and consolidated statements of changes in equity. 

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 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, graduate courses and medical post-graduate specialization programs, through printed and digital content, an online medical education platform and practical medical training.

 

F-11 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

 

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

 

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

 

The following table presents assets and liabilities information for the Company’s operating segments as of June 30, 2020 and December 31, 2019, respectively:

 

  June 30, 2020 (unaudited)
  Business unit 1 Business unit 2 Total Adjustments and eliminations Consolidated
Assets 3,658,276 192,235 3,850,511 (321) 3,850,190
Current assets 1,233,392 105,144 1,338,536 (321) 1,338,215
Non-current assets 2,424,884 87,091 2,511,975 - 2,511,975
           
Liabilities and equity 3,658,276 192,235 3,850,511 (321) 3,850,190
Current liabilities 429,912 32,935 462,847 (321) 462,526
Non-current liabilities 653,836 74,253 728,089 -    728,089
Equity 2,574,528 85,047 2,659,575  -  2,659,575
           
Other disclosures 88,091 7,797 95,888 - 95,888
Investment in associate  50,539  -    50,539  -    50,539
Capital expenditures (*)  37,552  7,797  45,349  -    45,349

 

  December 31, 2019
  Business   Unit 1 Business   Unit 2 Total Adjustments and eliminations Consolidated
           
Assets 2,714,161 199,285 2,913,446 (993) 2,912,453
Current assets 1,026,857 85,901 1,112,758 (993) 1,111,765
Non-current assets 1,687,304 113,384 1,800,688 - 1,800,688
Liabilities and equity 2,714,161 199,285 2,913,446 (993) 2,912,453
Current liabilities 312,303 21,919 334,222 (993) 333,229
Non-current liabilities 360,005 105,493 465,498 - 465,498
Equity 2,041,853 71,873 2,113,726 - 2,113,726
Other disclosures          
Investment in associate 45,634 - 45,634 - 45,634
Capital expenditures (*) 167,427 8,282 175,709 - 175,709

 

 

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

 

F-12 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

The following table presents statements of income for the Company’s operating segments for the six-month periods ended June 30, 2020 and 2019:

 

  June 30, 2020 (unaudited)
  Business unit 1 Business unit 2 Total Elimination (inter-segment transactions) Consolidated
           
External customer  446,147  100,368  546,515  -    546,515
Inter-segment  -     977  977  (977)  -   
Net revenue 446,147  101,345  547,492  (977)  546,515
Costs of services  (172,431)  (24,480)  (196,911)  977  (195,934)
Gross profit  273,716  76,865  350,581  -     350,581
General and administrative expenses          (176,762)
Other expenses, net          (748)
Operating profit          173,071
Finance income          42,780
Finance expenses          (40,802)
Share of income of associate         4,905
Income before income taxes          179,954
Income taxes expense          (12,398)
Net income for the period          167,556

 

  June 30, 2019 (unaudited)
 

Business

Unit 1

Business

Unit 2

 

Total

Elimination (inter-segment transactions) Consolidated
           
Net revenue          
External customer 301,518 21,553 323,071 - 323,071
Inter-segment - 1,818 1,818 (1,818) -
Net revenue 301,518 23,371 324,889 (1,818) 323,071
Costs of services (130,383) (8,082) (138,465) 1,818 (136,647)
Gross profit 171,135 15,289 186,424 - 186,424
General and administrative expenses         (90,818)
Other income, net         370
Operating profit         95,976
Finance income         9,817
Finance expenses         (31,957)
Share of income of associate         920
Income before income taxes         74,756
Income taxes expense         (3,954)
Net income for the period         70,802

 

 

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-13 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

 

4Business combinations

 

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

 

  UniRedentor* UniSL
Assets    
Cash and cash and equivalents 11,796 3,245
Trade receivables 4,800 21,567
Inventories - 467
Recoverable taxes 3 822
Other assets 2,486 7,251
Indemnification assets 710 12,645
Right-of-use assets 10,265 42,062
Property and equipment 4,207 19,149
Intangible assets 134,281 273,136
  168,548 380,344
Liabilities    
Trade payables (746) (3,554)
Loans and financing (16,187) (58,541)
Lease liabilities (10,265) (42,062)
Labor and social obligations (4,471) (8,070)
Taxes payable (850) (5,779)
Provision for legal proceedings (710) (12,645)
Advances from customers (10,994) (6,084)
Notes payable - (80,526)
Other liabilities - (14,754)
  (44,223) (232,015)
Total identifiable net assets at fair value 124,325 148,329
Preliminary goodwill arising on acquisition 85,780 53,192
Purchase consideration transferred 210,105 201,521
Cash paid 114,607 141,065
Payable in installments 95,498 60,456
Analysis of cash flows on acquisition:    
Transaction costs (included in cash flows from operating activities) (1,380) (1,666)
Cash paid, net of cash acquired with the subsidiary (included in cash flows from investing activities) (102,811) (137,820)
Net of cash flow on acquisition (104,191) (139,486)

 

 

*During the measurement period, the preliminary goodwill for the acquisition of UniRedentor was adjusted to R$85,780 (R$90,282 previously disclosed) as a result of a purchase consideration adjustment of R$4,502.

 

(a) Acquisition of UniRedentor

 

On January 31, 2020, Afya Brazil acquired 100% of the share capital of UniRedentor. The original purchase price of R$ 214,607, was adjusted by R$4,502 and was comprised by: i) R$114,607 paid in cash on the acquisition date; and ii) R$ 100,000 is payable in five equal installments from January 2021 to July 2024, adjusted by the CDI rate. The purchase consideration adjustement of R$4,502 will be deducted from the first installment due in January 2021.

 

UniRedentor is a post-secondary education institution with governmental authorization to offer on-campus, undergraduate degrees and graduate programs in medicine and health, as well as other courses, in the State of Rio de Janeiro. The acquisition will contribute with 112 medical school seats, with a potential 44 additional medical school seats subject to the approval by MEC and is in line with the Company’s strategy to focus on medical education, including medical school.

 

F-14 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

The acquisition of UniRedentor was accounted for under IFRS 3 – Business Combinations.

 

Transaction costs to date amount to R$ 1,380 and were expensed and are included in general and administrative expenses in the consolidated statement of income.

 

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 preliminary goodwill recognized includes the value of expected synergies arising from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Business Unit 1 segment. The preliminary goodwill recognized is not expected to be deductible for income taxes purposes.

 

The Company has not yet finalized the valuation of all identifiable assets acquired and liabilities assumed in the business combination of UniRedentor and therefore some of these amounts are preliminary. These amounts may be adjusted when the valuations are finalized.

 

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 earnings method

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

 

 

From the date of acquisition, this business combination has contributed R$ 40,244 of net revenue and R$ 9,465 of income before income taxes to the Company. Should the acquisition had taken place at the beginning of the period, net revenue for the six-month period ended June 30, 2020 would have been increased by R$ 5,931 and income before income taxes for the six-month period ended June 30, 2020 would have been decreased by R$ 321.

 

(b) Acquisition of UniSL

 

On May 5, 2020, Afya Brazil acquired 100% of the total share capital of UniSL. UniSL is a post-secondary education institution with governmental authorization to offer on-campus, undergraduate courses in medicine in the State of Rondônia. UniSL also offers other health related undergraduate degrees. The purchase consideration is R$201,521, of which: (i) 70% is payable in cash on the transaction closing date, and (ii) 30% is payable in cash in three equal installments through 2023, adjusted by the CDI rate. The acquisition will contribute with 182 medical school seats. There are 100 additional seats still pending approval which, if approved by MEC, will result in a potential additional payment of up to R$80,000, adjusted by the CDI rate. Such potential additional payment has not been recognized as the approval of additional seats have not yet occurred and is contingent.

 

F-15 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

 

The acquisition of UniSL was accounted for under IFRS 3 – Business Combinations.

 

Transaction costs to date amount to R$ 1,666 and were expensed and are included in general and administrative expenses in the consolidated statement of income.

 

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 preliminary goodwill recognized includes the value of expected synergies arising from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Business Unit 1 segment. The preliminary goodwill recognized is not expected to be deductible for income taxes purposes.

 

The Company has not yet finalized the valuation of all identifiable assets acquired and liabilities assumed in the business combination of UniSL and therefore some of these amounts are preliminary. These amounts may be adjusted when the valuations are finalized.

 

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 earnings method

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

 

 

From the date of acquisition, UniSL has contributed R$ 30,460 of net revenue and R$ 6,627 to the income before income taxes to the Company. If the acquisition had taken place at the beginning of the period, net revenue for the six-month period ended June 30, 2020 would have been increased by R$ 57,477 and income before income taxes for the six-month period ended June 30, 2020 would have been increased by R$ 9,455.

 

 

F-16 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

5Cash and cash equivalents

 

June 30, 2020   December 31, 2019
  (unaudited)    
       
Cash and bank deposits 25,433   13,092
Cash equivalents 1,016,029   930,117
  1,041,462   943,209

 

 

Cash equivalents correspond to financial investments in Bank Certificates of Deposit (“CDB”) with highly rated financial institutions. As of June 30, 2020, the average interest on these CDB are equivalent to 98.0% of the Interbank Certificates of Deposit (“CDI”) (December 31, 2019: 99.2%). These funds are available for immediate use and have insignificant risk of changes in value. Cash equivalents denominated in U.S. dollars totaled R$76,406 as of June 30, 2020 (December 31, 2019: R$2,529).

 

6Restricted cash

 

As of June 30, 2020, the restricted cash of R$12,955 (December 31, 2019: R$16,841) corresponds to financial investments in investment funds managed by highly rated financial institutions that serve as collateral for loans agreements. In accordance with the contractual terms, the Company is not allowed to withdraw any amounts until an integral payment of the loan.

 

As of June 30, 2020, the average interest on these funds are equivalent to 76.1% (December 31, 2019: 96.9%) of the CDI.

 

  June 30, 2020   December 31, 2019
  (unaudited)    
Collateral for loan in Euros with Banco Itaú 10,902   14,788
Other 2,053   2,053
Total 12,955   16,841
       
Current 10,902   14,788
Non-current 2,053   2,053

 

 

7Trade receivables
  June 30, 2020   December 31, 2019
  (unaudited)    
       
Tuition fees 152,462   86,798
Educational content (a) 51,571   37,154
FIES 43,544   17,789
Others 23,620   6,378
Proeducar 1,884   1,884
  273,081   150,003
(-) Allowance for doubtful accounts (20,596)   (14,763)
Total 252,485   135,240
       
Current 238,874   125,439
Non-current 13,611   9,801

 

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

 

F-17 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

As of June 30, 2020 and December 31, 2019, the aging of trade receivables was as follows:

  June 30, 2020   December 31, 2019
  (unaudited)    
       
Neither past due nor impaired 114,840   71,095
Past due      
1 to 30 days 39,276   15,042
31 to 90 days 59,948   27,221
91 to 180 days 37,617   20,543
More than 180 days 21,400   16,102
  273,081   150,003

 

The changes in the allowance for doubtful accounts for the six-month periods ended June 30, 2020 and 2019, was as follows:

 

  June 30, 2020   June 30, 2019
  (unaudited)   (unaudited)
       
Balances at the beginning of the period (14,763)   (7,537)
Additions (13,953)   (8,606)
Write-offs 8,120   2,498
Balances at the end of the period (20,596)   (13,645)

 

 

F-18 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

8Related parties

 

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

 

  June 30, 2020   December 31, 2019
  (unaudited)    
Assets      
Trade receivables (a) 455   577
  455   577
       
  June 30, 2020   June 30, 2019
  (unaudited)   (unaudited)
Other income      
Sales to UEPC (a) 104   683
  104   683
Lease payments      
RVL Esteves Gestão Imobiliária S.A. 5,478   5,888
UNIVAÇO Patrimonial Ltda. 1,452   1,364
IESVAP Patrimonial Ltda. 1,628   1,191
  8,558   8,443

 

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

 

Lease agreements with RVL Esteves Gestão Imobiliária S.A.

 

Afya Brazil has entered into lease agreements with RVL Esteves Gestão Imobiliária S.A. (“RVL”), an entity controlled by the shareholder Nicolau Carvalho Esteves and of which Mr. Renato Esteves is an executive officer, as described below:

 

On June 21, 2016, RVL entered into lease agreements (as amended on April 26, 2018) with ITPAC – Instituto Tocantinense Presidente Antônio Carlos S.A., or ITPAC, and Itpac Porto Nacional – Instituto Tocantinense Presidente Antonio Carlos Porto S.A., or ITPAC Porto Nacional, pursuant to which RVL Esteves Gestão Imobiliária S.A. agreed to lease campuses to ITPAC and ITPAC Porto Nacional in the cities of Araguaína and Porto Nacional, both located in the State of Tocantins. The lease agreements are adjustable in accordance with the provisions of each lease agreement. The lease agreements are for an initial term of 20 years and are renewable for an additional 20 years subject to the provisions of each lease agreement.

 

On November 1, 2016, RVL entered into a lease agreement with Afya Brazil, pursuant to which RVL agreed to lease to Afya Brazil certain offices located in the city of Nova Lima, State of Minas Gerais, where Afya Brazil’s principal executive offices are located. On February 9, 2019 the agreement was amended to extend lease terms and adjust the lease amounts, subject to certain discount conditions set forth in the lease agreement and adjustable in accordance with the provisions of the lease agreement. The lease agreement is for an initial term of 5 years and may be renewable for an additional 5 years subject to the provisions of the lease agreement.

 

On September 6, 2018, RVL entered into a lease agreement with ITPAC, a subsidiary of Afya Brazil, pursuant to which RVL agreed to lease to ITPAC the new ITPAC campus currently under construction by RVL in the city of Palmas, State of Tocantins. The lease agreement is for an amount equal to 7.5% of the monthly net revenue of ITPAC during the prior semester, which will start to become due once the new ITPAC campus becomes operational, subject to the provisions of the lease agreement. The lease agreement is for an initial term of 20 years, starting on the date the new ITPAC campus becomes operational, and is renewable for an additional 20 years subject to the provisions of the lease agreement.

 

F-19 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

 

On October 30, 2019, RVL entered into a lease agreement with IPTAN, pursuant to which RVL agreed to lease to IPTAN the new IPTAN medical campus, currently under construction by RVL in the city of Santa Inês, State of Maranhão. The lease agreement is for a monthly amount equal to (i) up to June 2020, R$12 and (ii) after June 2020 and until March 2024, 6.5% of the monthly net revenue of IPTAN assessed during the prior semester, in each case adjustable in accordance with the provisions of the lease agreement. The lease agreement is for an initial term of 20 years counted from the conclusion of the construction works and may be renewable for an additional 20 years subject to the provisions of the lease agreement.

 

The lease payments in connection with the lease agreements with RVL totaled R$5,478 and R$5,888 in the six-month periods ended June 30, 2020 and 2019, respectively.

 

Lease agreement with UNIVAÇO Patrimonial Ltda.

 

On July 14, 2016, UNIVAÇO Patrimonial Ltda., an entity controlled by the shareholder Nicolau Carvalho Esteves and of which Ms. Rosângela Esteves is the chief executive officer, entered into a lease agreement with UNIVAÇO, a subsidiary of Afya Brazil, pursuant to which UNIVAÇO Patrimonial Ltda. agreed to lease the UNIVAÇO campus to UNIVAÇO, located in the city of Ipatinga, State of Minas Gerais. The lease agreement is adjustable in accordance with the provisions of the lease agreement. The lease agreement is for an initial term of 20 years and is renewable for an additional 20 years subject to the provisions of the lease agreement. The lease payments in connection with this lease agreement totaled R$1,452 and R$1,364 in the six-month periods ended June 30, 2020 and 2019, respectively.

 

Lease agreement with IESVAP Patrimonial Ltda.

 

On April 25, 2018, IESVAP Patrimonial Ltda., an entity controlled by the shareholder Nicolau Carvalho Esteves and of which Mr. Renato Esteves is an executive officer, entered into a lease agreement with IESVAP, a subsidiary of Afya Brazil, pursuant to which IESVAP Patrimonial Ltda. agreed to lease the IESVAP campus to IESVAP located in the city of Parnaíba, State of Piauí. The lease agreement is for an amount equal to 7.5% of the monthly net revenue of IESVAP during the prior fiscal year. The lease agreement is for an initial term of 20 years and is renewable for an additional 20 years subject to the provisions of the lease agreement. The lease payments in connection with this lease agreement totaled R$1,628 and R$1,191 in the six-month periods ended June 30, 2020 and 2019, respectively.

 

F-20 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

Key management personnel compensation

 

Key management personnel compensation comprised the following:

 

  June 30, 2020   June 30, 2019
  (unaudited)   (unaudited)
Short-term employee benefits 5,679   1,289
Share-based compensation plan 9,380   1,372
  15,059   2,661

 

 

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

 

 

9Investment in associate

 

In connection with the corporate reorganization, described in Note 1 regarding the merger of 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:

 

    June 30, 2020   December 31, 2019
    (unaudited)    
         
Current assets   29,405   26,762
Non-current assets   80,499   77,031
Current liabilities   (20,703)   (29,328)
Non-current liabilities   (64,677)   (66,294)
Equity   24,524   8,171
Company’s share in equity – 30%   7,356   2,451
Goodwill   43,183   43,183
Carrying amount of the investment   50,539   45,634
         

 

    June 30, 2020   June 30, 2019
    (unaudited)   (unaudited)
Net revenue   61,193   28,924
Cost of services   (24,116)   (14,337)
General and administrative expenses   (18,100)   (8,713)
Finance result   (2,416)   182
Income before income taxes   16,561   6,056
Income taxes expenses   (210)   (390)
Net income for the period   16,351   5,666
Company’s share of income for the period   4,905   920
         

 

    June 30, 2020   June 30, 2019
    (unaudited)   (unaudited)
Opening balance   45,634   -
Acquisition of interest   -   48,915
Share of income   4,905   920
Closing balance   50,539   49,835

 

F-21 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

10  Property 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, 2018 30,503 2,770 182 11,897 10,243 12,838 597    11,882 10,736 91,648
Additions 3,448 515 - 2,573 849 369 15 1,362 11,543 20,674
Business combinations 3,988 - 103 2,565 2,035 4,096 418 14,541 470 28,216
As of June 30, 2019 (unaudited) 37,939 3,285 285 17,035 13,127 17,303 1,030 27,785 22,749 140,538
                     
As of December 31, 2019 44,329 7,005 707 21,438 15,994 18,139 1,049 30,911 36,731  176,303
Additions 6,460 673 - 2,446 3,833 680 - 4,638 18,853 37,583
Business combinations 4,114 - 266 2,346 1,811 703 - 9,441 4,675 23,356
As of June 30, 2020 (unaudited) 54,903 7,678 973 26,230 21,638 19,522 1,049 44,990 60,259 237,242
                     
Depreciation                    
As of December 31, 2018 (9,696) - (59) (4,261) (4,489) (7,015) (27)    (338) -    (25,885)
Depreciation (1,466) - - (802) (960) (751) (93) (516) - (4,588)
As of June 30, 2019 (unaudited) (11,162) - (59) (5,063) (5,449) (7,766) (120) (854) - (30,473)
                     
As of December 31, 2019 (13,793) - (59) (5,890) (6,537) (8,663) (386) (1,655) -    (36,983)
Depreciation (2,974) - (48) (845) (1,811) (1,022) (78) (795) - (7,573)
As of June 30, 2020 (unaudited) (16,767) - (107) (6,735) (8,348) (9,685) (464) (2,450) - (44,556)
                     
Net book value                    
As of December 31, 2019 30,536 7,005 648 15,548 9,457 9,476 663 29,256 36,731 139,320
As of June 30, 2020 (unaudited) 38,136 7,678 866 19,495 13,290 9,837 585 42,540 60,259 192,686

 

 

There were no indications of impairment of property and equipment as of and for the six-month period ended June 30, 2020.

 

F-22 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

11  Intangible 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, 2018 169,535 445,616 - 63,303 8,288 - 1,752 688,494
Additions (i) 4,030 - - - 170 - 548 4,748
Business combinations 290,186 150,156 32,111 62,110 - 17,305 2,845 554,713
As of June 30, 2019 (unaudited) 463,751 595,772 32,111 125,413 8,458 17,305 5,145 1,247,955
                 
As of December 31, 2019 459,409 703,772 32,111 125,413 9,389 17,305 14,241 1,361,640
Additions - - - - 699 - 7,067 7,766
Business combinations 138,972 328,459 55 76,084 2,819 - - 546,389
As of June 30, 2020 (unaudited) 598,381 1,032,231 32,166 201,497 12,907 17,305 21,308 1,915,795
                 
Amortization                
As of December 31, 2018 - - - (2,945) (3,080) - - (6,025)
Amortization - - (209) (11,987) (702) (2,165) (772) (15,835)
As of June 30, 2019 (unaudited) - - (209) (14,932) (3,782) (2,165) (772) (21,860)
                 
As of December 31, 2019 - - (1,150) (37,872) (4,536) (4,876) (868) (49,302)
Amortization - - (810) (23,606) (1,131) (3,806) (1,317) (30,670)
As of June 30, 2020 (unaudited) - - (1,960) (61,478) (5,667) (8,682) (2,185) (79,972)
                 
Net book value                
As of December 31, 2019 459,409 703,772 30,961 87,541 4,853 12,429 13,373 1,312,338
As of June 30, 2020 598,381 1,032,231 30,206 140,019 7,240 8,623 19,123 1,835,823

 

 

(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.

 

F-23 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

Impairment testing of goodwill and intangible assets with indefinite lives

 

The Company performed 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, 2019.

 

There were no indications of impairment of goodwill and intangible assets with indefinite lives for the six-month period ended June 30, 2020.

 

Other intangible assets

 

For the six-month period ended June 30, 2020, 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   June 30, 2020   December 31, 2019
    (unaudited)    
At amortized cost        
Cash and cash equivalents   1,041,462   943,209
Restricted cash   12,955   16,841
Trade receivables   252,485   135,240
Total   1,306,902   1,095,290
Current   1,291,238   1,083,436
Non-current   15,664   11,854
         
Derivatives not designated as hedging instruments        
Cross-currency interest rate swaps   8,720   -
Total   8,720   -
Current   8,720   -
Non-current   -   -

 

 

12.2  Financial liabilities

 

Financial liabilities   June 30,2020   December 31, 2019
    (unaudited)    
At amortized cost        
Trade payables   23,234   17,628
Loans and financing   61,402   60,357
Lease liabilities   394,240   284,515
Accounts payable to selling shareholders   395,446   300,237
Notes payable   78,437   -
Advances from customers   40,621   36,860
Total   993,380   699,597
Current   312,070   262,671
Non-current   681,310   436,926
         
Derivatives not designated as hedging instruments        
Cross-currency interest rate swaps   -   757
Total   -   757
Current   -   757
Non-current   -   -

 

F-24 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

12.2.1  Loans and financing

 

Financial institution Currency Interest rate Maturity June 30, 2020 December 31, 2019
Itaú Unibanco S.A. (c) Euro 1.01% p.y. 2020 35,968 52,959
Itaú Unibanco S.A. Brazilian real 15.66% p.y up to 16.21% p.y. 2020 910 648
FINEP (a) Brazilian real TJLP p.y. 2027 6,748 6,750
Banco da Amazônia S.A. (b) Brazilian real 3.56% p.y up to 5.05% p.y. 2028 10,267 -
BNDES (b) Brazilian real 10.03% p.y. 2024 509 -
CEF (b) Brazilian real 10.03% p.y. 2024 7,000 -
        61,402 60,357
Current       42,094 53,607
Non-current       19,308 6,750

 

 

(a)On July 23, 2019, Medcel entered into a loan of R$ 16,153 with Financiadora de Estudos e Projetos (“FINEP”), a governmental agency focused on financing investments on R&D, which has an interest rate based on TJLP (Long term interest rate), 2019 and maturity in 2027. The first tranche of R$ 6,734 was drawdown in October 2019 in order to develop the Medical web series. There is no financial covenant related to this agreement. The loan is guaranteed by bank warranty in the amount of R$ 6,734.

 

(b)On May 5, 2020, as a result of the acquisition of UniSL, the Company assumed loans agreements with Banco da Amazônia S.A. which has an interest rate of 3.56% to 5.05% per year and maturity for July 2028, BNDES wich has an interest rate of 10.03% per year and maturity in 2024 and Caixa Econômica Federal (CEF) wich has an interest rate of 10.03% per year and maturity in January 2024.

 

(c)On November 16, 2018, Afya Brazil entered into a euro-denominated loan agreement with Itaú Unibanco S.A. in the amount of R$ 74,980 (equivalent to €17,500). The loan accrues interest at 1.01% per annum and is repayable in three equal installments on November 18, 2019, May 18, 2020 and November 12, 2020. The loan agreement contains a financial covenant requiring Afya Brazil to maintain a Net Debt to EBITDA ratio less or equal to: 2.2x at end of 2018 and 2019 and 1.8x at the end of 2020. The Company is in compliance with the financial ratio at June 30, 2020. The loan is guaranteed by financial investments, classified as restricted cash, in the amount of R$ 10,902 as of June 30, 2020 (R$14,788 as of December 31, 2019), as disclosed in Note 6.

 

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 real) and derivative liabilities for the interest rate swap (1.01% p.y. to 128% of CDI). The swap agreements have three maturities on November 18, 2019, May 18, 2020 and November 12, 2020.

 

The table below summarizes the notional and fair value amounts of the swap agreements as of June 30, 2020 and December 31, 2019.

 

      Fair value
Cross-currency interest rate swap agreements Principal amount (notional)*   June 30, 2020 December 31, 2019
      (unaudited)  
Asset position: Euros + 1.01% p.y. 24,378   35,863 53,045
Liability position: 128% of CDI (24,378)   (27,143) 53,802
Net position     8,720 (757)
Current assets (liabilities)     8,720 (757)
Non-current assets (liabilities)     - -
*The outstanding notional amount in Euros was 5,689 thousand.

 

F-25 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

12.2.2

 Leases

 

The Company adopted IFRS 16 using the modified retrospective method of adoption with the date of initial application of January 1, 2019. The Company has lease contracts for properties. The maturity of the lease contracts generally has lease terms between 5 and 30 years. There are no sublease and variable payments in-substance lease agreements in the period. The incremental borrowing rate as at June 30, 2020 was from 9.3% up to 11.8%.

 

Set out below are the carrying amounts of right-of-use assets and lease liabilities and the movements in the six-month periods ended June 30, 2020 and 2019:

 

  Right-of-use assets   Lease liabilities
As at January 1, 2019 212,360   212,360
Additions 2,634   2,634
Business combinations 61,145   61,365
Depreciation expense (8,018)   -
Interest expense -   14,540
Payments of lease liabilities -   (17,316)
As at June 30, 2019 (unaudited) 268,121   273,583
       
As at December 31, 2019 274,275   284,515
Additions 43,147   43,147
Remeasurement 19,361   19,361
Business combinations 52,327   52,327
Depreciation expense (13,087)   -
Interest expense -   20,428
Payments of lease liabilities -   (25,538)
As at June 30, 2020 (unaudited) 376,023   394,240
       
As at December 31, 2019      
Current -   22,693
Non-current 274,275   261,822
As at June 30, 2020      
Current -   46,920
Non-current 376,023   347,320

 

The Company recognized lease expense from short-term leases and low-value assets of R$ 1,407 for the six-month period ended June 30, 2020 (R$ 733 for the six-month period ended June 30, 2019).

 

F-26 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

12.2.3  Accounts payable to selling shareholders

 

  June 30, 2020   December 31, 2019
  (unaudited)    
Acquisition of IESP (a) 76,782   75,450
Acquisition of FADEP (b) -   18,745
Acquisition of FASA (c) 66,766   105,306
Acquisition of IPEMED (d) 38,245   45,646
Acquisition of IPEC (e) 56,060   55,090
Acquisition of UniRedentor (f) 96,879   -
Acquisition of UniSL (g) 60,714   -
  395,446   300,237
Current 149,879   131,883
Non-current 245,567   168,354

 

  June 30, 2020   June 30, 2019
  (unaudited)   (unaudited)
Opening balance 300,237   177,730
Payments (67,304)   (30,674)
Interest 6,559   8,081
Business combination 155,954   147,560
Closing balance 395,446   302,697

 

(a)On November 27, 2018, Afya Brazil acquired 80% of IESP and the amounts of (i) R$8,906 was paid in February 2019, and (ii) R$106,200 is payable in three equal installments of R$35,400, each adjusted by the CDI rate through the payment date. The first installment was paid in November 2019 and the remaining two installments are due by the end of the second and third year from the transaction closing date.

 

(b)On December 5, 2018, Afya Brazil acquired 100% of FADEP and the amount of R$52,846 is payable in three equal installments of R$17,615, each adjusted by the SELIC rate through the payment date and due semiannually from the transaction closing date. The first installment was paid in June 2019, the second installment was paid in December 2019, and the last installment was paid in June 2020.

 

(c)On April 3, 2019, Afya Brazil acquired 90% of FASA and R$ 39,695 was paid in April 2020, R$ 29,770 is payable in April 2021, and R$ 29,770 is payable in April 2022; each adjusted by the IPCA rate + 4.1% per year.

 

(d)On May 9, 2019, Afya Brazil acquired 100% of IPEMED and R$ 45,303 is payable in five equal installments of R$ 9,061, adjusted by the CDI rate, and due annually in February 2020, 2021, 2022, 2023 and 2024.

 

(e)On August 13, 2019, Afya Brazil acquired 100% of IPEC and R$54,000 was paid in cash on the transaction closing date, and (ii) R$54,000 is payable in two equal installments, adjusted by the CDI rate, and due annually at the end of the first and the second year from the transaction closing date.

 

(f)On January 31, 2020, Afya Brazil acquired 100% of UniRedentor and R$ 114,607 was paid in cash on the transaction closing date, and the original amount of R$100,000 is payable in five equal installments from January 2021 through July 2024, adjusted by the CDI rate. The purchase consideration adjustement of R$4,502 will be deducted from the first installment due in January 2021.

 

F-27 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

(g)On May 5, 2020, Afya Brazil acquired 100% of UniSL. The purchase consideration is R$201,521, of which: R$ 141,065 was paid in cash on the transaction closing date, and R$ 60,456 is payable in three equal installments through 2023, adjusted by the CDI rate.

 

12.2.4  Notes payable

 

With the acquisition of UniSL, Afya Brazil assumed notes payable regarding the previous acquisition of a portion of the operations of Universidade Luterana do Brasil (ULBRA) by UniSL in auction by the end of 2018. Two of the UniSL campuses, located in the cities of Ji-Paraná and Porto Velho in the State of Rondônia, were acquired in such transaction. As at June 30, 2020, notes payable of R$78,437, has a final maturity in 2023 and is adjusted by 100% of IPCA-E.

 

Set out below are the carrying amount of notes payable and the movements during the period:

 

    Notes payable
     
As at January 1, 2020   -
Business combination   80,526
Payments   (1,611)
Monetary indexation*   (478)
     
As at June 30, 2020 (unaudited)   78,437
Current liabilities   9,322
Non-current liabilities   69,115

 

*For the period ended June 30, 2020, there was a negative IPCA-E inflation.

 

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:

 

    June 30, 2020   December 31, 2019
    Carrying amount   Fair value   Carrying amount   Fair value
Financial assets   (unaudited)        
Restricted cash   12,955   12,955   16,841   16,841
Trade receivables (non-current)   13,611   13,611   9,801   9,801
Derivatives   8,720   8,720   -   -
Total   35,286   35,286   26,642   26,642
                 
Financial liabilities                
Loans and financing   61,402   61,501   60,357   60,443
Lease liabilities   394,240   394,240   284,515   284,515
Accounts payable to selling shareholders   395,446   395,446   300,237   300,237
Notes payable   78,437   78,437   -   -
Derivatives   -   -   757   757
Total   929,525   929,624   645,866   645,952

 

 

F-28 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

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

 

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

 

The fair value of interest-bearing borrowings and loans are determined by using the DCF method using discount rate that reflects the issuer’s borrowing rate as at the end of the reporting period. The own non-performance risk at June 30, 2020 was assessed to be insignificant.

 

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, notes payable, 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 June 30, 2020.

 

(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.

 

F-29 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 
Sensitivity analysis

 

The following table demonstrates the sensitivity to a reasonably possible change in interest rates on cash equivalents, restricted cash, derivatives, loans and financing and accounts payable to selling shareholders and notes payable. With all variables held constant, the Company’s income before income taxes is affected through the impact on floating interest rates, as follows:

 

        Increase / decrease in basis points
  June 30, 2020
(unaudited)
           
Index – % per year Base rate        
    +75 -75 +150 -150
               
Cash equivalents 939,623 98.00% CDI 19,798 7,047 (7,047) 14,094 (14,094)
Restricted cash 12,955 76.10% CDI 212 97 (97) 194 (194)
Swap – liability position (27,143) 128% CDI (747) (204) 204 (407) 407
Loans and financing (6,748) TJLP (388) (51) 51 (101) 101
Accounts payable to selling shareholders (76,782) CDI (1,651) (576) 576 (1,152) 1,152
Accounts payable to selling shareholders (38,245) CDI (822) (287) 287 (574) 574
Accounts payable to selling shareholders (66,766) IPCA + 4.1% (4,854) (501) 501 (1,001) 1,001
Accounts payable to selling shareholders (56,060) CDI (1,205) (420) 420 (841) 841
Accounts payable to selling shareholders (96,879) CDI (2,083) (727) 727 (1,453) 1,453
Accounts payable to selling shareholders (60,714) CDI (1,305) (455) 455 (911) 911
Notes payable (78,437) 100% IPCA-E (2,486) (588) 588 (1,177) 1,177

 

 

(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$35,968 as of June 30, 2020 (December 31, 2019: R$52,959) and cash equivalents denominated in U.S. dollars in the amount of R$76,406 as of June 30, 2020 (December 31, 2019: R$2,529).

 

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

 

Foreign currency sensitivity

 

The following table demonstrates the sensitivity in the Company’s income before income taxes of a 10% change in the Euro exchange rate of R$ 6.1539 to Euro 1.00 and U.S. dollar exchange rate of R$ 5.4760 to US$ 1.00 as of June 30, 2020, with all other variables held constant.

 

  Exposure   +10%   -10%
As of June 30, 2020          
Cash equivalents 76,406   7,641   (7,641)
Loans and financing (35,968)   (3,597)   3,597
  40,438   4,044   (4,044)

 

 

F-30 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

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 management. Outstanding customer receivables are regularly monitored. See Note 7 for additional information on the Company’s trade receivables.

 

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

 

The Company’s maximum exposure to credit risk for the components of the statement of financial position at June 30, 2020 and December 31, 2019 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, accounts payable to selling shareholders and notes payable.

 

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

 

As of June 30, 2020 (unaudited) Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total
Trade payables 23,234  -     -     -    23,234
Loans and financing 52,821 30,438 7,928 11,706 102,893
Lease liabilities 52,542 99,115 93,746 623,806 869,209
Accounts payable to selling shareholders 157,566 228,261 62,753 - 448,580
Notes payable 9,020 27,369 50,757 - 87,146
Advances from customers 40,621 - - - 40,621
  335,804 385,183 215,184 635,512 1,571,683

 

As of December 31, 2019  Less than 1 year 1 to 3 years 3 to 5 years More than 5 years Total
Trade payables 17,628 - - - 17,628
Loans and financing 54,507 3,537 2,517 1,926 62,487
Lease liabilities 44,139 81,326 76,013 502,831 704,309
Accounts payable to selling shareholders 137,608 182,535 12,072 - 332,215
Advances from customers 36,860 - - - 36,860
Derivatives 757 - - - 757
  291,499 267,398 90,602 504,757 1,154,256

 

F-31 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

12.5  Changes in liabilities arising from financing activities

 

 

  January 1, 2020   Payments   Additions   Interest*   Foreign exchange movement Business combinations   Other  

June 30, 2020

(unaudited)

Loans and financing 60,357   (99,096)   911   4,938    19,564 74,728   -   61,402
Lease liabilities 284,515   (25,538)   43,147   20,428   - 52,327   19,361   394,240
Total 344,872    (124,634)   44,058    25,366   19,564 127,055   19,361   455,642
                             
                             

 

 

January 1, 2019   Payments   Additions   Interest   Foreign exchange movement Business combinations   Other  

June 30, 2019

(unaudited)

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

 

 

F-32 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

13  Fair value measurement

 

The following table provides the fair value measurement hierarchy of the Company’s assets and liabilities as of June 30, 2020 and December 31, 2019.

 

  Fair value measurement
 

 

 

Total

Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3)
June 30, 2020 (unaudited)        
Assets measured at fair value:        
Derivative financial assets        
Cross-currency interest rate swaps 8,720 - 8,720 -
Assets for which fair values are disclosed        
Restricted cash 12,955 - 12,955 -
Trade receivables (non-current) 13,611 - 13,611 -
Liabilities for which fair values are disclosed        
Loans and financing (61,501) - (61,501) -
Lease liabilities (394,240) - (394,240) -
Accounts payable to selling shareholders (395,446) - (395,446) -
Notes payable (78,437) - (78,437) -
         
  Fair value measurement
 

 

 

Total

Quoted prices in active markets (Level 1) Significant observable inputs (Level 2) Significant unobservable inputs (Level 3)
December 31, 2019        
Liabilities measured at fair value:        
Derivative financial liabilities        
Cross-currency interest rate swaps (757) - (757) -
Assets for which fair values are disclosed        
Restricted cash 16,841 - 16,841 -
Trade receivables (non-current) 9,801 - 9,801 -
Liabilities for which fair values are disclosed        
Loans and financing (60,443) - (60,443) -
Lease liabilities (284,515)   (284,515)  
         
Accounts payable to selling shareholders (300,237) - (300,237) -

 

 

14Capital management

 

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

 

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

 

F-33 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

 

  June 30, 2020  

December 31,

2019

  (unaudited)    
       
Loans and financing 61,402   60,357
Lease liabilities 394,240   284,515
Accounts payable to selling shareholders 395,446   300,237
Notes payable 78,437   -
Less: cash and cash equivalents (1,041,462)   (943,209)
Less: restricted cash (12,955)   (16,841)
Net debt (124,892)   (314,941)
Total equity 2,659,575   2,113,726
Total equity and net debt 2,534,683   1,798,785

 

No changes were made in the objectives, policies or processes for managing capital during the six-month period ended June 30, 2020.

 

15Labor and social obligations

 

a)Variable compensation (bonuses)

 

The Company recorded bonuses related to variable compensation of employees and management in cost of services and general and administrative expenses in the amount of R$ 6,731 and R$1,741 in the six-month periods ended June 30, 2020 and 2019, respectively.

 

b.1) Share-based compensation plans exercised in 2019

 

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

 

The stock options granted in June 2018 had the following vesting periods after the grant date: 10% after 90 days, 15% after 12 months, 25% after 24 months, 25% after 36 months and 25% after 48 months.

 

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

 

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

 

The stock options vest immediately at the following liquidity events: (i) an IPO, (ii) changes in the Company’s control group; and (iii) sale of Crescera’s interest on Afya Brazil. On July 18, 2019, Afya Limited completed its IPO and the stock options became vested and was fully exercised on July 31,2019 at Afya Limited.

 

F-34 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

 

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

 

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

 

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

 

In September 2019, as a result of the IPO and the options became vested, the Company had a capital increase through the issuance of 1,842,428 Class A common shares in the amount of R$ 17,627 related to the exercise of the stock options.

 

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

 

The following table illustrates the number and movements in stock options during the year ended December 31, 2019:

 

 

Number of

stock options

Outstanding at January 1, 2019 1,291,248
Granted 293,860
Forfeited -
Addition of Guardaya’s plan 257,320
Exercised (1,842,428)
Expired -
Outstanding at December 31, 2019 -

 

The number of common shares outstanding from Afya Brazil was retrospectively adjusted in the proportion of 1:28 due to the contribution of the shareholders of Afya Brazil into Afya in a one-to-28 exchange for the shares of Afya Brazil contributed to Afya, which did not result in changes on the arrangements of the plans.

 

 

F-35 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

b.2) Afya Limited share-based compensation plan

 

The stock options approved on August 30, 2019 as a result of the IPO will govern the issuance of equity incentive awards with respect to Company’s Class A common shares. On September 2, 2019 and September 25, 2019, the Company granted 2,306,214 and 58,000 stock options, respectively. The fair value of the stock options was estimated at the grant date using the Binomial pricing model, taking into account the terms and conditions on which the stock options were granted. The exercise price of the stock options granted is monetarily adjusted by the CDI rate. The Company accounts for the stock options plan as an equity-settled plan.

 

The stock options will vest in five installments of 20% per year, starting on May 1 of the year following the date of execution of the option agreement with each beneficiary.

 

On March 19, 2020, 230,000 additional stock options were granted, with an exercise price of US$19.00 each. These stock options will vest in four annual installments, representing each, respectively, 25% of the total stock options granted to such option holder. The final expiration for the exercise of the stock options granted to date is May 2024.

 

The share-based compensation expense recognized in general and administrative expenses in the statement of income for the six-month period ended June 30, 2020 was R$14,597.

 

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

 

 

Number of

stock options

Outstanding at January 1, 2020 2,364,213
Granted 230,000
Forfeited (164,531)
Exercised -
Expired -
Outstanding at June 30, 2020 (unaudited) 2,429,682

 

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

 

  March 2020   September 2019
Strike price at the measurement date US$ 19.00   US$ 19.00
Dividend yield (%) 0.0%   0.0%
Expected volatility (%) 39.7%   38.9%
Risk-free interest rate (%) 0.8%   1.4%
Expected life of stock options (years) 4.0   5.0
Share price at the measurement date US$ 16.30   US$ 21.90
Model used Binomial   Binomial
Weighted average fair value at the measurement date US$ 3.94   US$ 6.55

 

F-36 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

16Equity

 

a.Share capital

 

As of June 30, 2020, the Company’s share capital was R$ 17 (R$ 17 as of December 31, 2019) represented by 93,004,755 shares comprised by 44,970,440 class A common shares and 48,034,315 class B common shares (89,744,275 shares comprised by 31,814,690 class A common shares and 57,929,585 class B common shares as of December 31, 2019).

 

In 2020, the Company issued 3,260,480 of the Class A common shares through the public equity offering, as described in Note 1.

 

b.Afya Brazil

 

Prior to the completion of Afya’s IPO in July 2019, Afya Brazil was the predecessor of Afya. As such, the consolidated financial statements reflect the operating results of Afya Brazil prior to the reorganization, including the following equity transactions:

 

On March 8, 2019, the shareholders of Afya Brazil approved a renounce of dividends for the year ended December 31, 2016 of R$4,107; and an increase of capital through the issuance of 37,200 common shares, in the amount of R$ 0.01, subscribed entirely by the shareholders BR Health and certain members of the Esteves Family.

 

On March 12, 2019, the shareholders of Afya Brazil approved amongst other matters: (i) the change in its legal name to Afya Participações S.A.; (ii) a capital increase through the issuance of 156,337 common shares, in the amount of R$ 150,000, subscribed entirely by BR Health; and (iii) the propose to repurchase 160,000 common shares issued by the Company, at the acquisition price of R$ 206.25 per share, in the total amount of R$33,001, all held by the shareholder Nicolau Carvalho Esteves. The Company's common shares object of the repurchase approved were immediately canceled by the Company, without reduction of its share capital.

 

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

 

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

 

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

 

F-37 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

In addition to the capital increase related to the acquisition of the non-controlling interests of FASA, IESP and Univaço and the interest in UEPC, the Company had an additional paid-in capital of R$ 36,358.

 

c.Dividends

 

On March 8, 2019, the shareholders of Afya Brazil approved the cancellation of dividends for the year ended December 31, 2016 of R$4,107.

 

On June 13, 2019, Afya Brazil approved the payment of interim dividends totaling R$ 38,000 to Afya Brazil shareholders of record on June 13, 2019. The dividend amount was determined based on the Afya Brazil’s net income for the five months ended May 31, 2019 and was paid on September 26, 2019. Afya and its public shareholders were not entitled to receive such dividends.

 

In 2020, CCSI and IESVAP approved the payment of interim dividends totaling R$ 5,770 of which R$ 2,098 and R$ 3,672 was distributed to IESVAP and CCSI’s non-controlling shareholders, respectively. The dividends were already paid.

 

 

17Earnings per share (EPS)

 

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

 

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

 

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

 

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

 

  Three-month period ended Six-month period ended
  June 30, 2020 June 30, 2019   June 30, 2020 June 30, 2019
  (unaudited) (unaudited)   (unaudited) (unaudited)
Numerator          
Net income attributable to equity holders of the parent 60,679 16,317   160,495 57,852
           
Denominator*          
Weighted average number of outstanding shares 93,004,755 69,628,580   92,215,329 63,740,516
Effects of dilution from stock options 186,936 1,295,112   393,695 1,295,112
           
Weighted average number of outstanding shares adjusted for the effect of dilution 93,191,691 70,923,692   92,609,024 65,035,628
           
Basic earnings per share - R$ 0.65 0.23   1.74 0.91
Diluted earnings per share - R$ 0.65 0.23   1.73 0.89
           

*Considers the effects from the contribution of the shareholders of Afya Brazil into Afya in a one-to-28 exchange for the shares of Afya Brazil contributed to Afya.

 

F-38 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

18Revenue
  Three-month period ended   Six-month period ended
  June 30, 2020   June 30, 2019   June 30, 2020   June 30, 2019
  (unaudited)   (unaudited)   (unaudited)   (unaudited)
               
Tuition fees (*) 328,639   208,183   617,421   376,574
Other 12,109   10,782   46,793   11,778
Deductions              
  Granted discounts (19,603)   (15,353)   (30,748)   (21,459)
  Early payment discounts (7,273)   (1,056)   (13,131)   (1,721)
  Returns (1,275)   (2,129)   (5,189)   (3,250)
  Taxes (12,191)   (6,349)   (22,862)   (11,242)
  PROUNI (26,195)   (15,585)   (45,769)   (27,609)
Net revenue from contracts with customers 274,211   178,493   546,515   323,071  
Timing of revenue recognition of net revenue from contracts with customers              
Tuition fees - Transferred over time 262,222   169,545   501,964   313,273
Other revenue - Transferred at a point in time 11,989   8,948   44,551   9,798

 

(*) As mentioned in Note 1, the Company assessed, in connection with the social distancing requirements, whether it has satisfied all performance obligations of its contracts with customers, accorging to IFRS15, and concluded it was necessary to defer a portion of it’s net revenues in the second quarter of 2020. As result, R$14,465 of net revenue were deferred to the second semester of 2020 and recorded in advances from customers.

 

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

 

The following table presents revenue by segment for the six-month periods ended June 30, 2020 and 2019:

 

Revenue by segment

Business

Unit 1

Business

Unit 2

Elimination (inter-segment transactions) June 30, 2020
  (unaudited) (unaudited) (unaudited) (unaudited)
         
Types of services or goods 451,886 95,606 (977) 546,515
Tuition fees 449,035 52,325 - 501,360
Other 2,851 43,281 (977) 45,155
Timing of revenue recognition 451,886 95,606 (977) 546,515
Transferred over time 449,035 52,929 - 501,964
Transferred at a point in time 2,851 42,677 (977) 44,551

 

F-39 
 

Afya Limited

Notes to the unaudited interim condensed consolidated financial statements

June 30, 2020 and 2019

Expressed in thousands of Brazilian reais, unless otherwise stated

 

 

 

 

Revenue by segment

Business

Unit 1

Business

Unit 2

Elimination (inter-segment transactions) June 30, 2019
  (unaudited) (unaudited) (unaudited) (unaudited)
Types of services or goods 301,518 23,371 (1,818) 323,071
Tuition fees 300,890 12,383 - 313,273
Other 628 10,988 (1,818) 9,798
Timing of revenue recognition 301,518 23,371 (1,818) 323,071
Transferred over time 300,890 12,383 - 313,273
Transferred at a point in time 628 10,988 (1,818) 9,798

 

 

19Expenses and cost by nature

 

    Three-month period ended   Six-month period ended
    June 30, 2020   June 30, 2019   June 30, 2020   June 30, 2019
    (unaudited)   (unaudited)   (unaudited)   (unaudited)
                 
Cost of services   106,683   82,283   195,934   136,647
General and administrative expenses   90,039   59,584   176,762   90,818
Total   196,722   141,867   372,696   227,465
                 
Payroll   112,254   85,561   204,899   141,633
Depreciation and amortization   26,383   19,387   51,330   28,441
Hospital and medical agreements   9,800   3,329   18,503   6,016
Share-based compensation   6,157   868   14,597   1,909
Allowance for doubtful accounts   7,621   4,803   13,953   8,606
Consulting fees   5,711   2,213   10,368   2,486
Maintenance   5,777   2,552   9,026   4,048
Sales and marketing   3,551   3,984   6,904