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Afya(AFYA) - 2021 Q2 - Quarterly Report

Unaudited Interim Condensed Consolidated Financial Statements Statements of Financial Position Afya Limited's consolidated statements of financial position show a significant increase in total assets and liabilities as of June 30, 2021, compared to December 31, 2020, primarily driven by growth in cash and cash equivalents, loans and financing, and intangible assets Statements of Financial Position (in R$ thousands) | Metric (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :----------------------- | :------------------------ | :---------------- | | Total Assets | 5,981,934 | 4,793,093 | | Total Liabilities | 2,965,123 | 1,959,313 | | Total Equity | 3,016,811 | 2,833,780 | | Cash and cash equivalents| 1,424,718 | 1,045,042 | | Loans and financing (Non-current) | 1,348,942 | 510,323 | | Intangible assets | 3,112,982 | 2,573,010 | Statements of Income and Comprehensive Income For the six-month period ended June 30, 2021, Afya Limited reported increased net revenue and operating income, but a substantial negative shift in finance result led to a decrease in net income and basic/diluted earnings per share compared to the same period in 2020 Statements of Income and Comprehensive Income (in R$ thousands) | Metric (in R$ thousands) | Six-month period ended June 30, 2021 (unaudited) | Six-month period ended June 30, 2020 (unaudited) | | :----------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net revenue | 766,725 | 546,515 | | Cost of services | (270,951) | (195,934) | | Gross profit | 495,774 | 350,581 | | Operating income | 231,484 | 173,071 | | Finance result | (88,284) | 1,978 | | Net income | 135,293 | 167,556 | | Basic earnings per share | 1.34 | 1.74 | | Diluted earnings per share | 1.33 | 1.73 | Statements of Changes in Equity Afya Limited's total equity increased from December 31, 2020, to June 30, 2021, primarily due to net income and a capital increase, partially offset by treasury share repurchases and dividends to non-controlling interests Statements of Changes in Equity (in R$ thousands) | Metric (in R$ thousands) | Balances at December 31, 2020 | Balances at June 30, 2021 (unaudited) | | :----------------------- | :---------------------------- | :------------------------------------ | | Total equity | 2,833,780 | 3,016,811 | | Net income | - | 125,327 | | Capital increase | - | 74,500 | | Treasury shares | - | (64,752) | | Dividends declared to non-controlling interests | - | (10,617) | Statements of Cash Flows The company experienced a substantial net increase in cash and cash equivalents for the six-month period ended June 30, 2021, driven by strong operating and financing cash inflows, despite significant cash outflows for investing activities, mainly due to acquisitions Statements of Cash Flows (in R$ thousands) | Metric (in R$ thousands) | Six-month period ended June 30, 2021 (unaudited) | Six-month period ended June 30, 2020 (unaudited) | | :----------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net cash flows from operating activities | 320,515 | 189,417 | | Net cash flows used in investing activities | (623,052) | (351,025) | | Net cash flows from financing activities | 706,835 | 239,973 | | Net increase in cash and cash equivalents | 379,676 | 98,253 | | Cash and cash equivalents at beginning of period | 1,045,042 | 943,209 | - Acquisition of subsidiaries, net of cash acquired, resulted in a significant cash outflow of R$547,529 in the first six months of 2021, an increase from R$307,935 in the same period of 202013236 Notes to the Unaudited Interim Condensed Consolidated Financial Statements 1 Corporate Information Afya Limited, a Cayman Islands holding company, operates as the largest medical education group in Brazil through Afya Brazil, offering higher education, post-graduate courses, and digital services for physicians, completing a follow-on public offering in early 2020 and making six strategic acquisitions in 2021 - Afya Limited is a holding company incorporated in the Cayman Islands, with its consolidated financial information reflecting the operations of Afya Brazil, a network of higher education and post-graduate institutions focused on medicine in 18 Brazilian states1617239 - In February 2020, Afya completed a follow-on public offering, generating net proceeds of R$339,648 (US$78,846 thousand) for the Company18241 - In 2021, Afya Brazil acquired six companies: iClinic (SaaS medical practice management), Medicinae (healthcare payments), Medical Harbour (medical imaging solutions), Cliquefarma (drug price tracking), Shosp (clinical management software), and UNIFIPMoc (post-secondary medical education)202223243245246 COVID-19 Impact The COVID-19 pandemic led to temporary suspension of on-campus activities, transitioning to online platforms, deferring some junior student practical classes, and imposing mandatory discounts, yet the company reported no significant impact on financial performance or asset position - On-campus activities were interrupted due to mandatory lockdowns, with non-practical educational activities moved to an online platform25248 - Deferred revenues of R$3,540 were recorded as of June 30, 2021, due to the suspension of some practical educational activities for first to fourth-year students25248 - Mandatory discounts granted due to COVID-19 totaled R$17,318 during 2021, with R$13,531 related to the subsidiary FCMPB, leading to ongoing legal proceedings26249 - The COVID-19 pandemic has had no significant impact on the company's financial performance, asset position, or student payment default rates as of June 30, 202128251 2 Significant Accounting Policies The unaudited interim condensed consolidated financial statements are prepared in accordance with IAS 34 on a historical cost basis, presented in Brazilian Reais, with no material impact from new standards, and consolidate all controlled entities - The interim financial statements are prepared in accordance with IAS 34 Interim Financial Reporting on a historical cost basis, except for derivative financial instruments measured at fair value30253 - The financial statements are presented in Brazilian Reais (BRL), which is the Company's functional and presentation currency32255 - No new standards, interpretations, or amendments adopted in 2021 had a significant impact on the interim condensed consolidated financial statements34257 - The Company consolidates the financial information for all entities it controls, including numerous subsidiaries and one associate (UEPC)38261 3 Segment Information Afya revised its operating segments in Q1 2021 to Undergrad, Continuing Education, and Digital Services, with the Digital Services segment experiencing seasonality due to enrollment cycles and revenue recognition practices - The Company revised its operating segments in Q1 2021 to Undergrad, Continuing Education, and Digital Services, replacing previous business units42265 Segment Information (in R$ thousands) | Segment (in R$ thousands) | Total Assets (June 30, 2021) | Net Revenue (6 months ended June 30, 2021) | | :------------------------ | :--------------------------- | :----------------------------------------- | | Undergrad | 5,660,661 | 650,286 | | Continuing Education | 88,084 | 35,272 | | Digital Services | 233,189 | 81,167 | - Digital Services revenues, primarily from Medcel, are concentrated in the first and last quarters of the year due to enrollments and revenue recognition for printed books and e-books52275 4 Business Combinations Afya Brazil completed six acquisitions in H1 2021, primarily in digital health and medical education, involving cash and shares with contingent considerations, recognizing goodwill mainly allocated to the Digital Services segment with preliminary valuations Business Combinations (in R$ thousands) | Acquisition | Date of Acquisition | Purchase Consideration (R$ thousands) | Primary Business | Goodwill (R$ thousands) | | :---------- | :------------------ | :------------------------------------ | :--------------- | :---------------------- | | iClinic | Jan 21, 2021 | 191,120 | SaaS medical practice management | 99,260 | | Medicinae | Mar 25, 2021 | 9,172 | Healthcare payments & financial services | 4,584 | | Medical Harbour | Apr 8, 2021 | 11,278 | Educational health & medical imaging | 3,891 | | Cliquefarma | Apr 16, 2021 | 22,089 | Healthtech (drug price tracking) | 7,826 | | Shosp | May 13, 2021 | 7,901 | Clinical management software | 3,076 | | UNIFIPMoc | Jun 1, 2021 | 328,937 | Post-secondary medical education | 89,843 | - Goodwill recognized from these acquisitions is primarily allocated to the Digital Services segment, except for UNIFIPMoc, which is allocated to the Undergrad segment283288293299304312 - The valuations of identifiable assets and liabilities for these business combinations are preliminary and may be adjusted283288293299304312 5 Cash and Cash Equivalents Afya Limited's cash and cash equivalents significantly increased to R$1,424,718 as of June 30, 2021, primarily held in highly-rated Bank Certificates of Deposit and investment funds, with a portion denominated in U.S. dollars Cash and Cash Equivalents (in R$ thousands) | Metric (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :----------------------- | :------------------------ | :---------------- | | Cash and bank deposits | 49,528 | 57,729 | | Cash equivalents | 1,375,190 | 987,313 | | Total Cash and cash equivalents | 1,424,718 | 1,045,042 | - Cash equivalents are mainly invested in Bank Certificates of Deposit (CDB) and investment funds with highly rated financial institutions, yielding an average interest of 100.28% of CDI as of June 30, 202191314 - Cash equivalents denominated in U.S. dollars totaled R$87,378 as of June 30, 202191314 6 Trade Receivables Total trade receivables increased to R$398,793 as of June 30, 2021, from R$342,924 at December 31, 2020, with a corresponding increase in the allowance for doubtful accounts and a rise in overdue receivables Trade Receivables (in R$ thousands) | Metric (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :----------------------- | :------------------------ | :---------------- | | Total Trade Receivables | 398,793 | 342,924 | | Allowance for doubtful accounts | (40,339) | (32,980) | | Net Trade Receivables | 358,454 | 309,944 | Aging of Trade Receivables (in R$ thousands) | Aging of Trade Receivables (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :------------------------------------------- | :------------------------ | :---------------- | | Neither past due nor impaired | 140,682 | 145,076 | | Past due (1 to 30 days) | 52,794 | 44,365 | | Past due (31 to 90 days) | 72,084 | 57,198 | | Past due (91 to 180 days) | 61,474 | 51,521 | | Past due (More than 180 days) | 71,759 | 44,764 | - Additions to the allowance for doubtful accounts for the six-month period ended June 30, 2021, were R$20,509, compared to R$13,953 in the same period of 202097320 7 Related Parties Related party transactions include educational content sales to UEPC and shareholder reimbursements, with key management personnel compensation, including share-based compensation, increasing for the six-month period ended June 30, 2021 Related Party Assets (in R$ thousands) | Metric (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :----------------------- | :------------------------ | :---------------- | | Related Party Assets | 540 | 595 | Related Party Transactions (in R$ thousands) | Metric (in R$ thousands) | Six-month period ended June 30, 2021 (unaudited) | Six-month period ended June 30, 2020 (unaudited) | | :----------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net revenue from UEPC | 321 | 104 | | Key management personnel compensation | 18,305 | 15,059 | | Short-term employee benefits | 7,056 | 5,679 | | Share-based compensation plan | 11,249 | 9,380 | 8 Investment in Associate Afya Brazil maintains a 30% interest in UEPC, a medical school, accounted for using the equity method, with the carrying amount remaining stable and Afya's share of UEPC's net income increasing - Afya Brazil holds a 30% interest in UEPC, a medical school, and accounts for this investment using the equity method105328 Carrying Amount of Investment (in R$ thousands) | Metric (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :----------------------- | :------------------------ | :---------------- | | Carrying amount of the investment | 51,261 | 51,410 | UEPC Financial Performance (in R$ thousands) | Metric (in R$ thousands) | Six-month period ended June 30, 2021 (unaudited) | Six-month period ended June 30, 2020 (unaudited) | | :----------------------- | :----------------------------------------------- | :----------------------------------------------- | | UEPC Net revenue | 62,037 | 61,193 | | UEPC Net income for the period | 18,739 | 16,351 | | Company's share of income for the period | 5,622 | 4,905 | 9 Property and Equipment The net book value of property and equipment increased to R$329,330 as of June 30, 2021, from R$260,381 at December 31, 2020, primarily due to additions and business combinations, with no impairment identified Property and Equipment Net Book Value (in R$ thousands) | Metric (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :----------------------- | :------------------------ | :---------------- | | Net book value | 329,330 | 260,381 | - Additions to property and equipment for the six-month period ended June 30, 2021, totaled R$58,132, and R$24,806 was added through business combinations112335 - Depreciation expense for the six-month period ended June 30, 2021, was R$13,241112335 - No indications of impairment of property and equipment were identified for the six-month periods ended June 30, 2021 and 2020112335 10 Intangible Assets and Goodwill Intangible assets and goodwill significantly increased to R$3,112,982 as of June 30, 2021, primarily driven by business combinations, with annual impairment tests revealing no indications of impairment Intangible Assets and Goodwill Net Book Value (in R$ thousands) | Metric (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :----------------------- | :------------------------ | :---------------- | | Net book value | 3,112,982 | 2,573,010 | | Goodwill | 1,019,136 | 810,656 | | Licenses with indefinite useful life | 1,636,342 | 1,451,270 | - Business combinations contributed R$208,480 to goodwill and R$185,072 to licenses with indefinite useful life in the first six months of 2021115338 - No indications of impairment of goodwill and intangible assets with indefinite lives were found for the six-month period ended June 30, 2021116339 11 Financial Assets and Financial Liabilities Afya Limited's financial assets increased to R$1,786,324 and liabilities to R$2,707,749 as of June 30, 2021, driven by increased loans and financing, including Softbank shares, while the company actively manages market, credit, and liquidity risks Total Financial Assets and Liabilities (in R$ thousands) | Metric (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :----------------------- | :------------------------ | :---------------- | | Total Financial Assets (at amortized cost) | 1,786,324 | 1,357,039 | | Total Financial Liabilities (at amortized cost) | 2,707,749 | 1,759,191 | - Loans and financing increased significantly to R$1,466,621 as of June 30, 2021, from R$617,485 at December 31, 2020, primarily due to the issuance of R$817,238 in perpetual convertible preferred shares to Softbank122126345349 - The company is exposed to market risk (interest rate and foreign currency), credit risk, and liquidity risk, which are monitored and managed by the treasury department and Board of Directors153154155160163166376377378383386389 11.1 Financial Assets Financial Assets (in R$ thousands) | Financial assets (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :--------------------------------- | :------------------------ | :---------------- | | Cash and cash equivalents | 1,424,718 | 1,045,042 | | Financial investments | 3,152 | - | | Restricted cash | - | 2,053 | | Trade receivables | 358,454 | 309,944 | | Total | 1,786,324 | 1,357,039 | 11.2 Financial Liabilities Financial Liabilities (in R$ thousands) | Financial liabilities (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :-------------------------------------- | :------------------------ | :---------------- | | Trade payables | 41,490 | 35,743 | | Loans and financing | 1,466,621 | 617,485 | | Lease liabilities | 583,545 | 447,703 | | Accounts payable to selling shareholders | 466,663 | 518,240 | | Notes payable | 74,138 | 76,181 | | Advances from customers | 75,292 | 63,839 | | Total | 2,707,749 | 1,759,191 | 11.2.1 Loans and Financing Loans and Financing Details (in R$ thousands) | Financial institution | Currency | Interest rate | Maturity | June 30, 2021 (unaudited) (R$ thousands) | December 31, 2020 (R$ thousands) | | :-------------------- | :------------- | :----------------- | :------- | :--------------------------------------- | :------------------------------- | | Banco Itaú Unibanco S.A. | Brazilian real | CDI + 1.62% p.y. | 2023 | 505,745 | 504,365 | | Banco Votorantim | Brazilian real | CDI + 1.65% p.y. | 2021 | 102,062 | 101,785 | | BNDES | Brazilian real | 10.03% p.y. | 2024 | 333 | 471 | | FINEP | Brazilian real | TJLP p.y. | 2027 | 10,865 | 10,864 | | Softbank | Brazilian real | 6.5% p.y. | 2026 | 817,238 | - | | Banco Itaú Unibanco S.A. | Brazilian real | CDI + 1.75% p.y. | 2024 | 30,000 | - | | Pronampe | Brazilian real | SELIC +1.27% p.y. | 2023 | 375 | - | | Banco Bradesco S.A. | Brazilian real | 32.9% p.y | 2021 | 3 | - | | Total | | | | 1,466,621 | 617,485 | - On April 26, 2021, the Company issued 150,000 Series A perpetual convertible preferred shares to Softbank for US$150,000 thousand (R$821,805), classified as a financial liability at amortized cost126130349353 11.2.2 Leases Lease Liabilities and Right-of-Use Assets (in R$ thousands) | Metric (in R$ thousands) | Right-of-use assets (June 30, 2021) | Lease liabilities (June 30, 2021) | | :----------------------- | :---------------------------------- | :-------------------------------- | | As at December 31, 2020 | 419,074 | 447,703 | | Additions | 35,495 | 35,495 | | Remeasurement | 61,061 | 61,061 | | Business combinations | 52,167 | 52,167 | | Depreciation expense | (18,981) | - | | Interest expense | - | 29,213 | | Payments of lease liabilities | - | (37,888) | | Disposals | (3,832) | (4,206) | | As at June 30, 2021 (unaudited) | 544,984 | 583,545 | 11.2.3 Accounts Payable to Selling Shareholders Accounts Payable to Selling Shareholders (in R$ thousands) | Acquisition (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :---------------------------- | :------------------------ | :---------------- | | Acquisition of IESP | 39,260 | 38,771 | | Acquisition of FASA | 38,406 | 70,356 | | Acquisition of IPEMED | 29,334 | 38,622 | | Acquisition of IPEC | 28,666 | 28,307 | | Acquisition of UniRedentor | 82,945 | 97,773 | | Acquisition of UniSãoLucas | 41,394 | 53,386 | | Acquisition of FCMPB | 191,824 | 189,420 | | Acquisition of Medicinae | 3,572 | - | | Acquisition of Medical Harbour | 6,278 | - | | Acquisition of Cliquefarma | 2,939 | - | | Acquisition of Shosp | 2,045 | - | | Total | 466,663 | 518,240 | - The balance of accounts payable to selling shareholders decreased from R$518,240 at December 31, 2020, to R$466,663 at June 30, 2021, due to payments of R$75,804, partially offset by interest and new business combinations136359 11.2.4 Notes Payable - Notes payable, primarily assumed from the acquisition of UniSL, totaled R$74,138 as of June 30, 2021, with a final maturity in 2023 and adjusted by 100% of IPCA-E145368 Notes Payable Movement (in R$ thousands) | Metric (in R$ thousands) | 2021 (unaudited) | 2020 (unaudited) | | :----------------------- | :--------------- | :--------------- | | As at January 1 | 76,181 | - | | Payments | (5,288) | (1,611) | | Monetary indexation | 3,245 | (478) | | As at June 30 | 74,138 | 78,437 | 11.3 Fair Values Fair Value Measurement (in R$ thousands) | Financial Instrument (in R$ thousands) | Total (June 30, 2021) | Level 1 | Level 2 | Level 3 | | :------------------------------------- | :-------------------- | :------ | :---------- | :------ | | Financial assets | | | | | | Financial investments | 3,152 | - | 3,152 | - | | Restricted cash | - | - | - | - | | Trade receivables (non-current) | 26,061 | - | 26,061 | - | | Financial liabilities | | | | | | Loans and financing | (1,466,621) | - | (1,466,621) | - | | Lease liabilities | (583,545) | - | (583,545) | - | | Accounts payable to selling shareholders | (466,663) | - | (466,663) | - | | Notes payable | (74,138) | - | (74,138) | - | - There were no transfers between Level 1 and Level 2 in the fair value hierarchy during the six-month period ended June 30, 2021174397 11.4 Financial Instruments Risk Management Objectives and Policies - The Company's primary financial liabilities include loans and financing, lease liabilities, accounts payable to selling shareholders, notes payable, trade payables, and advances from customers, used to finance operations152375 - The Company monitors market risk (interest rate and foreign currency), credit risk, and liquidity risk, with policies reviewed by the Board of Directors, and no trading of derivatives for speculative purposes153154160163166376377378383386389 11.4.1 Market Risk - The Company is exposed to interest rate risk on floating-rate cash equivalents, loans, and payables, and foreign currency risk on U.S. dollar-denominated cash equivalents (R$87,378 as of June 30, 2021)155160378383 Interest Rate Sensitivity (in R$ thousands) | Financial Instrument (in R$ thousands) | Exposure (June 30, 2021) | Income before income taxes sensitivity (+75 bps) | Income before income taxes sensitivity (-75 bps) | | :------------------------------------- | :----------------------- | :----------------------------------------------- | :----------------------------------------------- | | Cash equivalents | 1,287,812 | 9,659 | (9,659) | | Loans and financing (CDI + 1.62%) | (505,745) | (3,793) | 3,793 | | Accounts payable to selling shareholders (CDI) | (413,423) | (3,101) | 3,101 | Foreign Currency Sensitivity (in R$ thousands) | Foreign Currency Exposure (in R$ thousands) | Exposure (June 30, 2021) | Income before income taxes sensitivity (+10%) | Income before income taxes sensitivity (-10%) | | :------------------------------------------ | :----------------------- | :-------------------------------------------- | :-------------------------------------------- | | Cash equivalents (USD) | 87,378 | 8,378 | (8,378) | 11.4.2 Credit Risk - Credit risk arises from operating activities (trade receivables) and financing activities (cash and cash equivalents, restricted cash)163386 - Customer credit risk is managed through established policies and regular monitoring of outstanding receivables163386 - Credit risk from banks and financial institutions is managed by the treasury department, with investments made only with approved counterparties within set limits165388 11.4.3 Liquidity Risk - Liquidity risk is monitored by management, maintaining reserves and bank credit facilities, and continuously reviewing projected and actual cash flows and maturity profiles166389 - Main financial resource requirements include payments for suppliers, operating expenses, labor and social obligations, loans and financing, lease liabilities, accounts payable to selling shareholders, and notes payable166389 Contractual Maturities of Financial Liabilities (in R$ thousands) | Financial Liabilities (in R$ thousands) | Less than 1 year | 1 to 3 years | 3 to 5 years | More than 5 years | Total | | :-------------------------------------- | :--------------- | :----------- | :----------- | :---------------- | :---------- | | Trade payables | 41,490 | - | - | - | 41,490 | | Loans and financing | 188,441 | 666,301 | 996,821 | 2,143 | 1,853,706 | | Lease liabilities | 85,530 | 170,388 | 162,851 | 919,952 | 1,338,721 | | Accounts payable to selling shareholders | 214,714 | 275,701 | | | 490,415 | | Notes payable | 12,679 | 69,211 | | | 81,890 | | Advances from customers | 75,292 | - | - | - | 75,292 | | Total | 618,146 | 1,181,601 | 1,159,672 | 922,095 | 3,881,514 | 11.5 Changes in Liabilities Arising from Financing Activities Changes in Liabilities from Financing Activities (in R$ thousands) | Metric (in R$ thousands) | January 1, 2021 | Payments | Additions * | Interest | Foreign exchange movement | Business combinations | Other | June 30, 2021 (unaudited) | | :----------------------- | :-------------- | :--------- | :---------- | :------- | :------------------------ | :-------------------- | :------ | :------------------------ | | Loans and financing | 617,485 | (12,952) | 809,539 | 21,422 | (20) | 31,147 | - | 1,466,621 | | Lease liabilities | 447,703 | (37,888) | 96,556 | 29,213 | - | 52,167 | (4,206) | 583,545 | | Dividends payable | - | (10,617) | 10,617 | - | - | - | - | - | | Total | 1,065,188 | (61,457) | 916,712 | 50,635 | (20) | 83,314 | (4,206) | 2,050,166 | - Additions to loans and financing include R$822,569 from the SoftBank transaction, net of R$13,030 in transaction costs170393 12 Fair Value Measurement Afya Limited's financial instruments primarily use Level 2 fair value measurements for assets like financial investments and non-current trade receivables, and for various liabilities, with no transfers between Level 1 and Level 2 during the period Fair Value Hierarchy (in R$ thousands) | Financial Instrument (in R$ thousands) | Total (June 30, 2021) | Level 1 | Level 2 | Level 3 | | :------------------------------------- | :-------------------- | :------ | :---------- | :------ | | Financial assets | | | | | | Financial investments | 3,152 | - | 3,152 | - | | Restricted cash | - | - | - | - | | Trade receivables (non-current) | 26,061 | - | 26,061 | - | | Financial liabilities | | | | | | Loans and financing | (1,466,621) | - | (1,466,621) | - | | Lease liabilities | (583,545) | - | (583,545) | - | | Accounts payable to selling shareholders | (466,663) | - | (466,663) | - | | Notes payable | (74,138) | - | (74,138) | - | - There were no transfers between Level 1 and Level 2 in the fair value hierarchy during the six-month period ended June 30, 2021174397 13 Capital Management Afya Limited's capital management aims to maximize shareholder value by monitoring net debt and total equity, with net debt significantly increasing to R$1,163,097 as of June 30, 2021, and no changes to policies - The primary objective of the Company's capital management is to maximize shareholder value, monitoring capital using net debt and total equity175398 Capital Management Metrics (in R$ thousands) | Metric (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :----------------------- | :------------------------ | :---------------- | | Net debt | 1,163,097 | 612,514 | | Total equity | 3,016,811 | 2,833,780 | | Total equity and net debt | 4,179,908 | 3,446,294 | - No changes were made in the objectives, policies, or processes for managing capital during the six-month period ended June 30, 2021178401 14 Labor and Social Obligations Afya Limited's labor and social obligations include variable and share-based compensation, with share-based compensation expense increasing significantly, the plan's strike price modified, and new stock options granted in H1 2021 Labor and Social Obligations (in R$ thousands) | Metric (in R$ thousands) | Six-month period ended June 30, 2021 (unaudited) | Six-month period ended June 30, 2020 (unaudited) | | :----------------------- | :----------------------------------------------- | :----------------------------------------------- | | Variable compensation (bonuses) | 9,645 | 6,731 | | Share-based compensation expense | 25,102 | 14,597 | - The strike price of the share-based compensation plan was changed in July 2020 to be measured in Brazilian Reais adjusted by the CDI rate180403 Stock Options Movement | Stock Options Movement | Weighted average exercise price (in Reais) | Number of stock options | | :--------------------------------------- | :--------------------------------------- | :---------------------- | | Outstanding at January 1, 2021 | 78.22 | 2,510,983 | | Granted | 112.36 | 929,000 | | Exercised | 76.27 | (311,270) | | Outstanding at June 30, 2021 (unaudited) | 89.71 | 3,128,713 | 15 Equity As of June 30, 2021, Afya Limited's share capital remained at R$17, with 93,722,831 shares, dividends declared to non-controlling interests, and 521,117 Class A common shares repurchased for R$64,752 under a buy-back program - As of June 30, 2021, the Company's share capital was R$17, represented by 93,722,831 shares (45,688,516 Class A and 48,034,315 Class B common shares)186409 - Interim dividends of R$34,881 were approved, with R$24,264 distributed to Afya and R$10,617 to non-controlling shareholders in the six-month period ended June 30, 2021187410 - Under a share buy-back program, Afya repurchased 521,117 Class A common shares for R$64,752 in H1 2021, using 311,270 of these shares (R$38,677) to settle the share-based program190413 16 Earnings Per Share (EPS) Basic and diluted earnings per share decreased for the six-month period ended June 30, 2021, reflecting lower net income attributable to equity holders of the parent Earnings Per Share (in R$ thousands) | Metric | Six-month period ended June 30, 2021 (unaudited) | Six-month period ended June 30, 2020 (unaudited) | | :--------------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Net income attributable to equity holders of the parent | 125,327 | 160,495 | | Weighted average number of outstanding shares | 93,307,071 | 92,215,329 | | Basic earnings per share (R$) | 1.34 | 1.74 | | Diluted earnings per share (R$) | 1.33 | 1.73 | - Diluted EPS calculations include the effect of stock options granted to key management using the treasury shares method193416 17 Revenue Net revenue from contracts with customers significantly increased to R$766,725 for the six-month period ended June 30, 2021, primarily driven by higher tuition fees, with revenue recognized over time for tuition and digital content, and at a point in time for other services Revenue from Contracts with Customers (in R$ thousands) | Revenue Category (in R$ thousands) | Six-month period ended June 30, 2021 (unaudited) | Six-month period ended June 30, 2020 (unaudited) | | :--------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Tuition fees | 900,615 | 617,421 | | Other revenue | 89,272 | 46,793 | | Granted discounts | (76,190) | (30,748) | | Taxes | (33,224) | (22,862) | | PROUNI | (74,824) | (45,769) | | Net revenue from contracts with customers | 766,725 | 546,515 | Revenue by Segment (in R$ thousands) | Revenue by Segment (in R$ thousands) | June 30, 2021 (unaudited) | June 30, 2020 (unaudited) | | :----------------------------------- | :------------------------ | :------------------------ | | Undergrad | 650,286 | 451,886 | | Continuing Education | 35,272 | 52,325 | | Digital Services | 81,167 | 43,281 | - The majority of revenue (R$714,372 in H1 2021) is recognized over time for tuition, digital content, and app subscriptions, while R$52,353 is recognized at a point in time for other revenue419421423 18 Expenses and Cost by Nature Total expenses and costs by nature increased to R$536,539 for the six-month period ended June 30, 2021, from R$372,696 in the prior year, driven by higher payroll, depreciation and amortization, and share-based compensation Expenses and Cost by Nature (in R$ thousands) | Expense Category (in R$ thousands) | Six-month period ended June 30, 2021 (unaudited) | Six-month period ended June 30, 2020 (unaudited) | | :--------------------------------- | :----------------------------------------------- | :----------------------------------------------- | | Cost of services | 270,951 | 195,934 | | General and administrative expenses | 265,588 | 176,762 | | Total | 536,539 | 372,696 | | Payroll | 285,192 | 204,899 | | Depreciation and amortization | 66,915 | 51,330 | | Share-based compensation | 25,102 | 14,597 | | Allowance for doubtful accounts | 20,509 | 13,953 | 19 Finance Result Afya Limited's finance result shifted from a net income of R$1,978 in H1 2020 to a significant net expense of R$(88,284) in H1 2021, primarily due to increased finance expenses from loans, lease liabilities, and foreign exchange losses Finance Result (in R$ thousands) | Metric (in R$ thousands) | Six-month period ended June 30, 2021 (unaudited) | Six-month period ended June 30, 2020 (unaudited) | | :----------------------- | :----------------------------------------------- | :----------------------------------------------- | | Finance income | 22,250 | 42,780 | | Finance expenses | (110,534) | (40,802) | | Finance result | (88,284) | 1,978 | - Key components of finance expenses for H1 2021 include interest expense (R$34,075), interest expense on lease liabilities (R$29,213), and net foreign exchange loss (R$24,622)204427 20 Income Taxes Income tax expenses for the six-month period ended June 30, 2021, were R$(13,529), a slight decrease from R$(12,398) in the prior year, influenced by the PROUNI fiscal incentive and presumed profit regime, with unrecognized deferred income tax assets reported - Income taxes are assessed and paid by legal entity in Brazil, not on a consolidated basis206429 Income Taxes (in R$ thousands) | Metric (in R$ thousands) | Six-month period ended June 30, 2021 (unaudited) | Six-month period ended June 30, 2020 (unaudited) | | :----------------------- | :----------------------------------------------- | :----------------------------------------------- | | Income before income taxes | 148,822 | 179,954 | | Income taxes expense – current | (13,529) | (12,398) | | PROUNI - Fiscal incentive | 93,688 | 63,127 | - As of June 30, 2021, the Company had unrecognized deferred income tax assets on temporary differences and tax losses totaling R$298,855 (tax-basis)208431 21 Insurance Contracts and Contingencies Afya Limited maintains a risk management program with provisions for probable legal proceedings (labor, civil, and taxes) increasing to R$70,195 as of June 30, 2021, while selling shareholders are responsible for pre-acquisition contingencies with indemnification assets recorded - The Company has a risk management program for insurance contracts211434 Legal Proceedings Provisions (in R$ thousands) | Legal Proceedings (in R$ thousands) | June 30, 2021 (unaudited) | December 31, 2020 | | :---------------------------------- | :------------------------ | :---------------- | | Total provisions for probable loss | 70,195 | 53,139 | | Labor | 5,621 | 4,519 | | Civil | 15,127 | 13,280 | | Taxes | 49,447 | 35,340 | - Selling shareholders are exclusively responsible for pre-acquisition legal proceedings, with R$68,411 recorded as indemnification assets216218439441 - Other legal proceedings with a possible risk of loss totaled R$58,508 as of June 30, 2021215438 22 Non-Cash Transactions Significant non-cash transactions in H1 2021 included share issuance for iClinic and Cliquefarma acquisitions, additions and remeasurements of right-of-use assets and lease liabilities, and provisions for legal proceedings with indemnification assets - Issuance of shares for the acquisitions of iClinic and Cliquefarma were non-cash transactions219442 - Additions and remeasurements of right-of-use assets and lease liabilities were non-cash transactions219442 - The addition of the provision for legal proceedings with corresponding indemnification assets was a non-cash transaction219442 23 Subsequent Events Significant subsequent events include Afya Brazil's acquisition of UNIGRANRIO for R$627,603 with potential additional payments, and Bertelsmann's acquisition of Crescera's Class B common shares in Afya - On August 4, 2021, Afya Brazil acquired 100% of UNIGRANRIO, a post-secondary education institution in Rio de Janeiro, for R$627,603 (60% cash, 40% payable)220443 - The UNIGRANRIO acquisition includes a potential additional payment of up to R$90,200 if 82 additional medical seats are approved by the Ministry of Education220443 - On August 5, 2021, an affiliate of Bertelsmann SE& Co. KGaA acquired all 23,074,134 Class B common shares of Afya from Crescera Educacional II Fundo de Investimento em Participações Multiestrategia222445