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Washington, D.C. 20549
Securities for which there is a reporting obligation pursuant to
Section 15(d) of the Act:
Indicate the number of outstanding shares of each of the issuer’s
classes of capital or common stock as of the close of the period covered by the annual report.
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
If this report is an annual or transition report, indicate by check
mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically
every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the
preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or an emerging growth company. See definition of “large accelerated filer,”
“accelerated filer,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
If an emerging growth company that prepares its financial statements
in accordance with U.S. GAAP, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards† provided pursuant to Section 13(a) of the Exchange Act. ☐
† The term “new or revised financial accounting standard”
refers to any update issued by the Financial Accounting Standards Board to its Accounting Standards Codification after April 5, 2012.
If securities are registered pursuant to Section 12(b) of the Act,
indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to
previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are
restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s executive officers
during the relevant recovery period pursuant to § 240.10D-1(b). ☐
Indicate by check mark whether the registrant has filed a report
on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section
404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report.
☒
Indicate by check mark which basis of accounting the registrant has
used to prepare the financial statements included in this filing:
☐ U.S. GAAP
If “Other” has been checked in response to the previous
question, indicate by check mark which financial statement item the registrant has elected to follow.
If this is an annual report, indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Exchange Act).
PART I
INTRODUCTION
Certain Definitions
Unless otherwise indicated or the context otherwise requires,
all references in this annual report to “Afya” or the “Company,” “we,” “our,” “ours,”
“us” or similar terms refer to Afya Limited, together with its subsidiaries; all references in this annual report to “Afya
Brazil” refer to Afya Participações S.A. (formerly NRE Participações S.A.); all references in this annual
report to “BR Health” refer to BR Health Participações S.A.; all references in this annual report to “Medcel”
refer to Guardaya Empreendimentos e Participações S.A., or Guardaya, and its subsidiaries Medcel Editora e Eventos S.A.,
or Medcel, and CBB Web Serviços e Transmissões On Line S.A., or CBB Web; and all references in this annual report to “IPTAN”
refer to IPTAN—Instituto de Ensino Superior Presidente Tancredo de Almeida Neves S.A., “IESVAP” refer to Instituto de
Educação Superior do Vale do Parnaíba S.A., “CCSI” refer to Centro de Ciências em Saúde
de Itajubá S.A., “IESP” refer to Instituto de Ensino Superior do Piauí S.A., “CIS” refer to Centro
Integrado de Saúde de Teresina Ltda., “FADEP” refer to FADEP—Faculdade Educacional de Pato Branco Ltda., “FASA”
refer to Instituto Educacional Santo Agostinho S.A., “ESMC” refer to ESMC Educação Superior Ltda., “IPEMED”
refer to Instituto de Pesquisa e Ensino Médico do Estado de Minas Gerais Ltda., “IPEC” refer to Instituto Paraense
de Educação e Cultura Ltda, “UniRedentor” refer to Sociedade Universitária Redentor S.A., “UniSL”
refer to Centro Universitário São Lucas Ltda., “PEBMED” refer to PEBMED Instituição de Pesquisa
Médica e Serviços Tecnológicos da Área da Saúde S.A., “FESAR” refer to Faculdade de Ensino
Superior da Amazônia Reunida, “MedPhone” refer to MedPhone Tecnologia em Saúde Ltda., “FCMPB” refer
to Centro Superior de Ciências da Saúde S/S Ltda., “UNIFIPMoc” refer to Sociedade Padrão de Educação
Superior Ltda. and NASPP - Núcleo de Atenção à Saúde e de Práticas Profissionalizantes Ltda.,
collectively, “iClinic” refer to iClinic Participações S.A., iClinic Desenvolvimento de Software Ltda. and Black
River Brazil Participações S.A., collectively, “Medicinae” refer to Medicinae Solutions S.A., “Medical
Harbour” refer to Medical Harbour Aparelhos Médico-Hospitalares e Serviços em Tecnologia Ltda., “Cliquefarma”
refer to Cliquefarma Drogarias Online Ltda., “Shosp” refer to Shosp Tecnologia da Informação Ltda., “Unigranrio”
refer to Companhia Nilza Cordeiro Herdy de Eduação e Cultura, Instituto de Ensino Superior de Palhoça S/S Ltda.,
Sociedade Educacional de Palhoça S/S Ltda., and Policlínica e Centro de Estética Duque de Caxias Ltda., collectively,
“RX PRO” refer to RX PRO Soluções de Tecnologia Ltda. and RX PRO LOG Transporte e Logistica Ltda., collectively,
“Garanhuns” refer to Faculdade ITPAC Garanhuns - Instituto Tocantinense Presidente Antonio Carlos Ltda., “Além
da Medicina” refer to BMV Atividades Médicas Ltda., “Cardiopapers” refer to Cardiopapers Soluções
Digitais Ltda, “Glic” refer to Quasar Telemedicina Desenvolvimento de Sistemas Computacionais Ltda., “DelRey”
refer to Sociedade Educacional e Cultural Sergipe DelRey Ltda., “ITPAC Araguaína” refer to ITPAC - Instituto Tocantinense
Presidente Antônio Carlos S.A., and “ITPAC Porto Nacional” refer to ITPAC Porto Nacional - Instituto Tocantinense Presidente
Antônio Carlos Porto S.A.
The term “Esteves Family” refers to Nicolau
Carvalho Esteves, Rosângela de Oliveira Tavares Esteves, NRE Capital Ventures Ltd, Renato Tavares Esteves, Vanessa Tavares Esteves
and Lílian Tavares Esteves de Carvalho, collectively, our former controlling shareholders. The term “Bertelsmann” refers
to Bertelsmann SE & Co. KGaA and Erste WV Gütersloh GmbH, collectively, our currently controlling shareholder.
The term “Brazil” refers to the Federative
Republic of Brazil and the phrase “Brazilian government” refers to the federal government of Brazil. “Central Bank”
refers to the Brazilian Central Bank (Banco Central do Brasil). References in the annual report to “real,” “reais”
or “R$” refer to the Brazilian real, the official currency of Brazil and references to “U.S. dollar,” “U.S.
dollars” or “US$” refer to U.S. dollars, the official currency of the United States.
Financial Information
Afya is a Cayman Islands exempted company with limited
liability duly registered with the Cayman Islands Registrar of Companies and incorporated on March 22, 2019. Afya became the holding company
of Afya Brazil, formerly denominated NRE Participações S.A., through the completion of the corporate reorganization described
in note 1 to our audited consolidated financial statements (as defined below) and in Item 4. Information on the Company—A. History
and Development of the Company—Our Pre-IPO Corporate Reorganization.
The consolidated financial information of Afya contained
in this annual report is derived from our audited consolidated financial statements as of December 31, 2022 and 2021 and for the years
ended December 31, 2022, 2021 and 2020, together with the notes thereto. All references herein to “our financial statements,”
“our audited consolidated financial information,” and “our audited consolidated financial statements” are to Afya’s
consolidated financial statements included elsewhere in this annual report.
Afya is a holding company, and as such, the primary source
of revenue derives from its interest in its operational companies in Brazil. As a result, Afya’s functional currency as well as
of its subsidiaries is the Brazilian real. We prepare our annual consolidated financial statements in accordance with International
Financial Reporting Standards, or IFRS, as issued by the International Accounting Standards Board, or IASB.
The financial results of the companies that we acquire
in any given period (such companies, the “Acquired Companies”) are included in our historical results as of the date of closing
of the respective acquisition. See “Item 4. Information on the Company—B. Business Overview—Our Recent Acquisitions”
for further details on entities acquired since January 1, 2020. The financial results of DelRey are not reflected in the summary consolidated
historical financial data included elsewhere in this annual report as the consummation of the acquisition of such entity occurred after
the year ended December 31, 2022.
Our fiscal year ends on December 31 of each year, so
all references to a particular fiscal year are to the applicable year ended December 31.
Historical Undergraduate Programs Combined Tuition Fees
The term “historical undergraduate programs combined
tuition fees” refers to the sum equal to the total tuition fees charged to undergraduate students, as recorded in the historical
operating information of Afya Brazil and the Acquired Companies, since the consummation of their respective acquisition.
The historical undergraduate programs combined tuition
fees information included elsewhere in this annual report (i) was derived from historical operating information for Afya Brazil and
for each of the Acquired Companies since the consummation of their respective acquisition; (ii) is akin to gross tuition fees charged
to undergraduate students; (iii) differs from the tuition fees set forth in our audited consolidated financial statements, which
are presented as the sum of (a) gross tuition fees charged to undergraduate students, (b) gross tuition fees charged to graduate
students and (c) scholarships; and (iv) does not represent revenue as disclosed in our audited consolidated financial statements
included elsewhere in this annual report. For the years ended December 31, 2022, 2021 and 2020, historical undergraduate programs combined
tuition fees charged to undergraduate students by us were R$2,241.8 million, R$1,990.1 million and R$1,236.5 million, respectively. Historical
undergraduate programs combined tuition fees does not include tuition fees we charge graduate students.
Our consolidated operating history and recent acquisitions
may make it difficult for investors to evaluate our business, financial condition, results of operations and prospects. We experienced
rapid and significant expansion in recent years to the effects of the acquisition of the Acquired Companies. Because the historical and
operational information included elsewhere in this annual report may not be representative of our results and operations as a consolidated
company, investors may have limited financial and operational information on which to evaluate us and their investment decision. See “Item
3. Key Information—D. Risk Factors—Certain Risks Relating to Our Business and Industry—Our operating history as a consolidated
company, our recent acquisitions and the comparability of our results may make it difficult for investors to evaluate our business, financial
condition, results of operations and prospects.”
The Company’s past performance, as reflected in
the historical undergraduate programs combined tuition fees information included elsewhere in this annual report, may not be indicative
of its future performance or any future anticipated synergies, future operating efficiencies or cost savings that may result from these
acquisitions.
Convenience Translation
The reporting currency for our audited consolidated financial
statements is the Brazilian real and, solely for the convenience of the reader, we have provided convenience translations into
U.S. dollars using the selling exchange rates published by the Central Bank on its website. Unless otherwise indicated, convenience translations
from reais into U.S. dollars in this annual report use the Central Bank offer exchange rate published on December 31, 2022, which
was R$5.218 per US$1.00. No representation is made that the Brazilian reais amounts referred to could have been, or could be, converted into U.S. dollars at any particular rate. See
“Item 3. Key Information—A. Selected Financial Data—Exchange Rates” for information regarding historical exchange
rates of reais to U.S. dollars.
Market Data
This annual report contains data related to economic
conditions in the market in which we operate. The information contained in this annual report concerning economic conditions is based
on publicly available information from third-party sources that we believe to be reasonable. Market data and certain industry forecast
data used in this annual report were obtained from internal reports and studies, where appropriate, as well as estimates, market research,
publicly available information (including information available from the United States Securities and Exchange Commission website) and
industry publications. We obtained the information included in this annual report relating to the industry in which we operate, as well
as the estimates concerning market shares, through internal research, a report by a third-party consulting firm commissioned by us, public
information and publications on the industry prepared by official public sources, such as the Central Bank, the Brazilian Institute of
Geography and Statistics (Instituto Brasileiro de Geografia e Estatística), or the IBGE, the Organisation for Economic Co-operation
and Development, or OECD, the Brazilian Ministry of Education (Ministério da Educação), or MEC, the Anísio
Teixeira National Institute of Educational Studies and Research (Instituto Nacional de Estudos e Pesquisas Educacionais Anísio
Teixeira), or the INEP, the Institute of Applied Economic Research (Instituto de Pesquisa Econômica Aplicada), or the
IPEA as well as private sources, such as Bloomberg, consulting and research companies in the Brazilian and international education industry,
the Brazilian Economic Institute of Fundação Getulio Vargas (Instituto Brasileiro de Economia da Fundação
Getulio Vargas), or FGV/IBRE, the Association of American Medical Colleges, or AAMC among others.
Industry publications, governmental publications and
other market sources, including those referred to above, generally state that the information they include has been obtained from sources
believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. While we are not aware of any misstatements
regarding the market and industry data presented herein, our estimates involve risks and uncertainties and are subject to change based
on various factors, including those discussed in the section entitled “Item 3. Key Information—D. Risk Factors.” Except
as disclosed in this annual report, none of the publications, reports or other published industry sources referred to in this annual report
were commissioned by us or prepared at our request. Except as disclosed in this annual report, we have not sought or obtained the consent
of any of these sources to include such market data in this annual report.
Rounding
We have made rounding adjustments to some of the figures
included in this annual report. Accordingly, numerical figures shown as totals in some tables may not be an arithmetic aggregation of
the figures that preceded them.
Forward-Looking Statements
This annual report on Form 20-F contains information
that constitute forward-looking statements within the meaning of Section 27A of the Securities Act, and Section 21E of the Securities
Exchange Act of 1934, as amended, or Exchange Act, that are not based on historical facts and are not assurances of future results. The
forward-looking statements contained in this annual report, which address our expected business and financial performance, among other
matters, contain words such as “believe,” “expect,” “estimate,” “anticipate,” “intend,”
“plan,” “aim,” “will,” “may,” “should,” “could,” “would,”
“likely,” “potential” and similar expressions. We have made forward-looking statements that address, among other
things, our current expectations, plans, forecasts, projections and strategies about future events and financial trends that affect, or
may affect, our business, industry, market share, reputation, financial condition, results of operations, margins, cash flow and/or the
market price of our common shares, all of which are subject to known and unknown risks and uncertainties. Our actual results may differ
materially from those expressed or implied in the forward-looking statements due to various factors, including, but not limited to, those
identified under the section entitled “Item 3. Key Information—D. Risk Factors” in this annual report. These risks and
uncertainties include factors relating to:
| · | our ability to implement our business strategy; |
| · | changes in government regulations and legislation applicable to the education industry in Brazil, both in the traditional and distance
learning segments, including tax regulations and/or legislation; |
| · | government interventions, including changes in, or termination of, education industry programs such as the Higher Education Student
Financing Fund (Fundo de Financiamento ao Estudante do Ensino Superior), or FIES, and/or the University for All Program (Programa
Universidade para Todos), or PROUNI, both in the traditional and distance learning segments, that affect the economic or tax regime,
the collection of tuition fees or the regulatory framework applicable to educational institutions; |
| · | changes in the financial condition of the students enrolling in our institutions in general and in the competitive conditions in the
education industry, both in the traditional and distance learning segments, or changes in the financial condition of our institutions; |
| · | our ability to adapt to technological changes in the educational sector, including in relation to distance learning programs; |
| · | the availability of government authorizations on terms and conditions and within periods acceptable to us; |
| · | health epidemics, pandemics and similar outbreaks, including the COVID-19 pandemic and measures taken in response (including legal
or regulatory measures or decisions mandating discounted tuition fees as a result of the COVID-19 pandemic); |
| · | our ability to continue attracting and retaining new students; |
| · | our ability to maintain the academic quality of our programs; |
| · | our ability to compete and conduct our business in the future; |
| · | the success of operating initiatives, including advertising and promotional efforts and new product, service and concept development
by us and our competitors; |
| · | changes in consumer demands and preferences and technological advances, and our ability to innovate to respond to such changes; |
| · | the availability of qualified personnel and the ability to retain such personnel; |
| · | our capitalization and level of indebtedness; |
| · | the interests of our controlling shareholders; |
| · | a decline in the number of students enrolled in our programs or the amount of tuition we can charge; |
| · | changes in labor, distribution and other operating costs; |
| · | our compliance with, and changes to, government laws, regulations and tax matters that currently apply to us; |
| · | general economic, financial, political, demographic and business conditions in Brazil, as well as any other countries we may serve
in the future and their impact on our business; |
| · | fluctuations in interest, inflation and exchange rates in Brazil and any other countries we may serve in the future; |
| · | other factors that may affect our financial condition, liquidity and results of operations; |
| · | the effectiveness of our risk management policies and procedures, including our internal control over financial reporting; and |
| · | the other factors discussed under the section “Risk Factors” in this annual report on Form 20-F. |
Prospective investors are cautioned that any such forward-looking
statements are not guarantees of future performance and involve risks and uncertainties, and that actual results may differ materially
from those in the forward-looking statements. The accompanying information contained in this annual report on Form 20-F, including without
limitation the information set forth under the heading “Item 5. Operating and Financial Review and Prospects,” identifies
important factors that could cause such differences. In light of the risks, uncertainties and assumptions associated with forward-looking
statements, you should not place undue reliance on any forward-looking statements. Additional risks that we may currently deem immaterial
or that are not presently known to us could also cause the forward-looking events discussed in this annual report on Form 20-F not to
occur.
Our forward-looking statements speak only as of the date
of this annual report on Form 20-F, and we do not undertake any obligation to update them in light of new information or future developments
or to release publicly any revisions to these statements in order to reflect later events or circumstances or to reflect the occurrence
of unanticipated events.
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
A. Selected Financial Data
The following table sets forth selected consolidated
historical financial data of Afya as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020. The selected
consolidated historical financial data as of December 31, 2022 and 2021 and for the years ended December 31, 2022, 2021 and 2020 has been
derived from our audited consolidated financial statements, included elsewhere in this annual report. The financial results of the Acquired
Companies are included in our historical results for the periods following the closing of each such transaction, respectively. See “Part
I—Introduction—Financial Information.”
The selected audited consolidated historical financial
data should be read in conjunction with “Part I—Introduction—Financial Information,” “Item 5. Operating
and Financial Review and Prospects” and our audited consolidated financial statements, including the respective notes thereto, included
elsewhere in this annual report.
The selected audited consolidated historical financial
data presented in this annual report may not be indicative of future performance.
|
For the Year
Ended December 31, |
|
2022 |
2022 |
2021 |
2020 |
|
(in US$ millions(1)) |
(in R$ millions) |
Statement of Income |
|
|
|
|
Revenue |
446.4 |
2,329.1 |
1,719.4 |
1,201.2 |
Cost of services |
(164.7) |
(859.6) |
(652.3) |
(434.7) |
Gross profit |
281.7 |
1,469.5 |
1,067.1 |
766.5 |
General and administrative expenses |
(153.0) |
(798.2) |
(622.6) |
(402.9) |
Other expenses, net |
(1.4) |
(7.3) |
(3.6) |
(0.3) |
Operating income |
127.3 |
664.0 |
440.9 |
363.3 |
Finance income |
19.6 |
102.0 |
64.6 |
62.3 |
Finance expenses |
(67.1) |
(349.9) |
(243.8) |
(98.3) |
Finance result |
(47.5) |
(247.9) |
(179.2) |
(36.0) |
Share of income of associate |
2.3 |
12.2 |
11.8 |
7.7 |
Income before income taxes |
82.1 |
428.3 |
273.5 |
335.0 |
Income taxes expenses |
(6.8) |
(35.7) |
(31.2) |
(27.1) |
Net income |
75.3 |
392.6 |
242.3 |
307.9 |
Income attributable to: |
|
|
|
|
Equity holders of the parent |
71.6 |
373.6 |
223.3 |
292.1 |
Non-controlling interests |
3.7 |
19.2 |
19.0 |
15.9 |
|
US$ |
R$ |
R$ |
R$ |
Earnings per share |
|
|
|
|
Basic earnings per share |
|
|
|
|
Common shares |
0.79 |
4.14 |
2.39 |
3.15 |
Diluted earnings per share |
|
|
|
|
Common shares |
0.79 |
4.12 |
2.37 |
3.12 |
| (1) | For convenience purposes only, amounts in reais for the year ended December 31, 2022 have been translated to U.S. dollars using an
exchange rate of R$5.218 to US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2022, as reported by the Central
Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted
at that or any other exchange rate. See “—Exchange Rates” for further information about recent fluctuations in exchange
rates. |
|
As of December
31, |
|
2022 |
2022 |
2021 |
|
(in US$ millions(1)) |
(in R$ millions) |
Balance Sheet Data |
|
|
|
Assets |
|
|
|
Current assets |
|
|
|
Cash and cash equivalents |
209.5 |
1,093.1 |
748.6 |
Trade receivables |
86.8 |
452.8 |
378.4 |
Inventories |
2.3 |
12.2 |
11.8 |
Recoverable taxes |
5.3 |
27.8 |
25.6 |
Other assets |
9.9 |
51.8 |
42.5 |
Total current assets |
313.8 |
1,637.6 |
1,206.9 |
Non-current assets |
|
|
|
Trade receivables |
8.2 |
42.6 |
27.4 |
Other assets |
36.8 |
191.8 |
180.3 |
Investment in associate |
103.9 |
542.1 |
48.4 |
Property and equipment |
10.3 |
53.9 |
419.8 |
Right-of-use assets |
132.3 |
690.1 |
663.7 |
Intangible assets |
774.5 |
4,041.5 |
3,900.9 |
Total non-current assets |
1,066.1 |
5,562.0 |
5,240.5 |
Total assets |
1,379.9 |
7,199.6 |
6,447.4 |
Liabilities |
|
|
|
Current liabilities |
|
|
|
Trade payables |
13.7 |
71.5 |
59.1 |
Loans and financing |
27.8 |
145.2 |
128.7 |
Lease liabilities |
6.2 |
32.5 |
25.0 |
Accounts payable to selling shareholders |
50.2 |
261.7 |
239.8 |
Notes payable |
11.9 |
62.2 |
14.5 |
Advances from customers |
25.5 |
133.1 |
114.6 |
Labor and social obligations |
29.6 |
154.5 |
131.3 |
Taxes payable |
5.0 |
26.2 |
26.7 |
Income taxes payable |
3.1 |
16.2 |
11.6 |
Other liabilities |
0.6 |
2.7 |
15.2 |
Total current liabilities |
173.5 |
905.8 |
766.5 |
Non-current liabilities |
|
|
|
Loans and financing |
333.0 |
1,737.7 |
1,246.2 |
Lease liabilities |
141.3 |
737.1 |
689.1 |
Accounts payable to selling shareholders |
51.2 |
267.0 |
440.0 |
Notes payable |
— |
— |
58.2 |
Taxes payable |
17.8 |
92.9 |
96.6 |
Provision for legal proceedings |
37.5 |
195.9 |
148.3 |
Other liabilities |
2.5 |
13.2 |
2.5 |
Total non-current liabilities |
583.3 |
3,043.8 |
2,680.9 |
Total liabilities |
756.8 |
3,949.6 |
3,447.4 |
Equity |
|
|
|
Additional paid-in capital |
455.2 |
2,375.3 |
2,375.3 |
Share-based compensation reserve |
23.7 |
123.5 |
94.1 |
Treasury stock |
(58.4) |
(304.9) |
(152.6) |
Earnings reserves |
192.6 |
1,004.9 |
631.3 |
Equity attributable to equity holders of the parent |
613.1 |
3,198.8 |
2,948.1 |
Non-controlling interests |
9.8 |
51.3 |
51.9 |
Total equity |
622.9 |
3,250.1 |
3,000.0 |
Total liabilities and equity |
1,379.7 |
7,199.7 |
6,447.4 |
| (1) | For convenience purposes only, amounts in reais as of December 31, 2022 have been translated to U.S. dollars using an exchange
rate of R$5.218 to US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2022, as reported by the Central Bank. These
translations should not be considered representations that any such amounts have been, could have been or could be converted at that or
any other exchange rate. See “—Exchange Rates” for further information about recent fluctuations in exchange rates. |
Non-GAAP Financial Measures
This annual report presents our Adjusted EBITDA and Operating
Cash Conversion Ratio information for the convenience of investors, which are non-GAAP financial measures. A non-GAAP financial measure
is generally defined as one that purports to measure financial performance but excludes or includes amounts that would not be so adjusted
in the most comparable GAAP measure. Although Adjusted EBITDA and Operating Cash Conversion Ratio are used by investors and securities
analysts in their evaluation of companies, these measures have limitations as analytical tools, and you should not consider them in isolation
or as substitutes for the IFRS measures of earnings. Additionally, our calculations of Adjusted EBITDA and Operating Cash Conversion Ratio
may be different from the calculations used by other companies, including our competitors in the education services industry, and therefore,
our measures may not be comparable to those of other companies.
We present Adjusted EBITDA because we believe this measure
provides investors with a supplemental measure of the financial performance of our core operations that facilitates period-to-period comparisons
on a consistent basis. We calculate our Adjusted EBITDA as net income plus/minus finance result plus income taxes expense
plus depreciation and amortization plus interest received on late payments of monthly tuition fees, minus income
share associate, plus share-based compensation expense plus/minus non-recurring expenses.
We also present Operating Cash Conversion Ratio because
we believe this measure provides investors with a measure of how efficiently we convert our EBITDA into cash. We calculate our Operating
Cash Conversion Ratio as the cash flows from operations plus/minus income taxes paid divided by Adjusted EBITDA plus/minus
non-recurring expenses.
The following tables set forth the Adjusted EBITDA reconciliation
to our net income and the Operating Cash Conversion Ratio reconciliation to our cash flow from operations for the years ended December
31, 2022, 2021 and 2020, in each case, our most recent directly comparable financial measures calculated and presented in accordance with
IFRS.
Reconciliation between Net Income and Adjusted EBITDA
|
For the Year
Ended December 31, |
|
2022 |
2022 |
2021 |
2020 |
|
(in US$ millions(1)) |
(in R$ millions) |
Net income |
75.3 |
392.6 |
242.3 |
308.0 |
Finance result |
47.5 |
247.9 |
179.2 |
36.0 |
Income taxes expense |
6.8 |
35.7 |
31.2 |
27.1 |
Depreciation and amortization |
39.5 |
206.2 |
154.2 |
108.7 |
Interest received(2) |
5.2 |
27.2 |
23.0 |
11.9 |
Income share associate |
(2.3) |
(12.2) |
(11.8) |
(7.7) |
Share-based compensation expense |
6.0 |
31.3 |
43.4 |
32.6 |
Non-recurring expenses(3): |
|
|
|
|
Integration of new companies(4) |
4.7 |
24.8 |
18.9 |
9.8 |
M&A advisory and due diligence(5) |
0.5 |
2.5 |
13.5 |
6.2 |
Expansion projects(6) |
0.7 |
3.4 |
10.2 |
18.1 |
Restructuring expenses(7) |
2.4 |
12.3 |
17.4 |
5.9 |
Mandatory discounts in tuition fees(8) |
(1.9) |
(9.9) |
33.4 |
6.5 |
Adjusted EBITDA |
184.4 |
962.1 |
754.9 |
563.1 |
| (1) | For convenience purposes only, amounts in reais for the year ended December 31, 2022 have been translated to U.S. dollars using an
exchange rate of R$5.218 to US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2022, as reported by the Central
Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted
at that or any other exchange rate. See “—Exchange Rates” for further information about recent fluctuations in exchange
rates. |
| (2) | Consists of interest received on late payments of monthly tuition fees. |
| (3) | We believe these adjustments are appropriate to provide additional information to investors about certain material non-cash or non-recurring
items that we do not expect to continue at the same level in the future. |
| (4) | Consists of expenses related to the integration of recently acquired companies, such as expenses with personnel and third party consulting
firms. |
| (5) | Consists of expenses related to professional and consultant fees in connection with due diligence services for our M&A transactions. |
| (6) | Consists of expenses related to professional and consultant fees in connection with the opening of new campuses. |
| (7) | Consists of expenses related to the employee redundancies in connection with the organizational restructuring of our acquired companies. |
| (8) | Consists of mandatory discounts in tuition fees granted by state decrees and individual/collective legal proceedings and public civil
proceedings due to COVID 19 on-site class restriction, and excludes any recovery of these discounts that were invoiced based on the decision
by the Brazilian Federal Supreme Court (Supremo Tribunal Federal), or the Brazilian Supreme Court, with respect to this matter. |
Reconciliation between Cash Flow from Operations and
Operating Cash Conversion Ratio
|
For the Year
Ended December 31, |
|
2022 |
2022 |
2021 |
2020 |
|
(in US$ millions(1)) |
(in R$ millions) |
|
(except percentages) |
Net cash flows from operating activities |
161.7 |
843.9 |
630.8 |
371.5 |
Income taxes paid |
6.3 |
33.1 |
35.7 |
19.4 |
Net cash flows from operating activities, before income taxes paid |
168.1 |
877.0 |
666.5 |
390.9 |
Adjusted EBITDA |
184.4 |
962.1 |
754.9 |
563.1 |
Integration of new companies(2) |
4.7 |
24.8 |
18.9 |
9.8 |
M&A advisory and due diligence(3) |
0.5 |
2.5 |
13.5 |
6.2 |
Expansion projects(4) |
0.7 |
3.4 |
10.2 |
18.1 |
Restructuring expenses(5) |
2.4 |
12.4 |
17.4 |
5.9 |
Mandatory discounts in tuition fees(6) |
(1.9) |
(9.9) |
33.4 |
6.5 |
Adjusted EBITDA ex. non-recurring expenses |
178.0 |
928.8 |
661.4 |
516.6 |
Operating Cash Conversion Ratio(7) |
94.4% |
94.4% |
100.8% |
75.7% |
| (1) | For convenience purposes only, amounts in reais for the year ended December 31, 2022 have been translated to U.S. dollars using an
exchange rate of R$5.218 to US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2022, as reported by the Central
Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted
at that or any other exchange rate. See “—Exchange Rates” for further information about recent fluctuations in exchange
rates. |
| (2) | Consists of expenses related to the integration of recently acquired companies, such as expenses with personnel and third-party consulting
firms. |
| (3) | Consists of expenses related to professional and consultant fees in connection with due diligence services for our M&A transactions. |
| (4) | Consists of expenses related to professional and consultant fees in connection with the opening of new campuses. |
| (5) | Consists of expenses related to the employee redundancies in connection with the organizational restructuring of our acquired companies. |
| (6) | Consists of mandatory discounts in tuition fees granted by state decrees and individual/collective legal proceedings and public civil
proceedings due to COVID 19 on-site class restriction, and excludes any recovery of these discounts that were invoiced based on the decision
by the Brazilian Supreme Court with respect to this matter. |
| (7) | We calculate Operating Cash Conversion Ratio as the cash flows from operations plus/minus income taxes paid divided by Adjusted
EBITDA plus/minus non-recurring expenses. |
Operating Data (Historical)
Key Revenue Drivers – Undergrad Segment
|
As of and For
the Year Ended December 31, |
|
2022 |
2021 |
2020 |
UNDERGRAD SEGMENT |
|
|
|
Medical School |
|
|
|
Approved Seats(1) |
2,823 |
2,731 |
2,143 |
Operating Seats(1) |
2,773 |
2,481 |
1,893 |
Total Students (end of period) |
17,968 |
16,017 |
11,030 |
Average Total Students |
17,761 |
14,492 |
9,413 |
Average Total Students (ex-Acquisitions)(2) |
15,883 |
10,872 |
9,413 |
Tuition Fees (Total) (in R$ thousands) |
2,032,888 |
1,511,442 |
910,966 |
Tuition Fees (ex-Acquisitions) (in R$ thousands)(2) |
1,791,590 |
1,123,944 |
910,966 |
Medical School Gross Avg. Ticket (ex-Acquisitions)(R$/month)(2)(3) |
9,400 |
8,615 |
8,065 |
Medical School Net Avg. Ticket (ex-Acquisitions)(R$/month)(2)(4) |
7,896 |
6,433 |
N/A |
|
|
|
|
Undergraduate Health Science |
|
|
|
Total Students (end of period) |
17,967 |
19,882 |
10,325 |
Average Total Students |
19,441 |
15,918 |
10,733 |
Average Total Students (ex-Acquisitions)(2) |
15,293 |
11,173 |
10,733 |
Tuition Fees (Total) (in R$ thousands) |
336,238 |
239,512 |
152,539 |
Tuition Fees (ex-Acquisitions) (in R$ thousands)(2) |
249,550 |
148,381 |
152,539 |
|
|
|
|
Other Undergraduate |
|
|
|
Total Students (end of period) |
22,265 |
25,219 |
14,851 |
Average Total Students |
23,376 |
20,198 |
14,087 |
Average Total Students (ex-Acquisitions)(2) |
16,209 |
10,734 |
14,087 |
Tuition Fees (Total)(in R$ thousands) |
266,306 |
239,235 |
172,961 |
Tuition Fees (ex-Acquisitions)(in R$ thousands)(2) |
200,690 |
147,239 |
172,961 |
|
|
|
|
Total Tuition Fees |
|
|
|
Tuition Fees (Total)(in R$ thousands) |
2,635,432 |
1,990,189 |
1,236,466 |
Tuition Fees (ex-Acquisitions)(in R$ thousands)(2) |
2,241,830 |
1,419,574 |
1,236,466 |
|
|
|
|
Revenue |
|
|
|
Revenue (Total)(in R$ thousands) |
2,037,889 |
1,498,408 |
1,002,461 |
Revenue (ex-Acquisitions)(in R$ thousands)(2) |
1,777,484 |
1,136,404 |
1,002,461 |
| (1) | Approved Seats and Operating Seats do not include the acquisition of UNIT Alagoas and FITS Jaboatão dos Guararapes, which closed
on January 2, 2023. |
| (2) | Ex-Acquisitions” figures accounts for revenue received by our acquired companies in a given period only after the date of their
acquisition, i.e. for a period of less than 12 months, and excludes any revenue prior to such date. For the year ended December 31, 2022,
“ex-Acquisitions” excludes: UNIFIPMoc and FIPGuanambi (from January to May 2022; closing of the UNIFIPMoc and FIPGuanambi
acquisitions was in June 2021); Unigranrio (from January to July 2022; closing of the Unigranrio acquisition was in August 2021); and
Garanhuns (from January to October 2022; closing of the Garanhuns acquisition was in November 2021). For the year ended December 31, 2021,
“ex-Acquisitions” excludes: UniRedentor (for January 2021; closing of the UniRedentor acquisition was on January 31, 2020);
UniSL (from January to April 2021; closing of the UniSL acquisition was in May 2020); FCMPB (from January to October 2021; closing of
the FCMPB acquisition was in November 2020); FESAR (from January to October 2021; closing of the FESAR acquisition was in November 2020);
UNIFIPMoc and FIPGuanambi (from June to December 2021; closing of the UNIFIPMoc and FIPGuanambi acquisitions was in June 2021); Unigranrio
(from August to December 2021; closing of the Unigranrio acquisition was in August 2021); and Garanhuns (from November to December 2021;
closing of the Garanhuns acquisition was in November 2021). |
| (3) | Medical School Gross Avg. Ticket (ex-Acquisitions) is calculated as Tuition Fees (ex-Acquisitions) divided by the Average Total Students
(ex-Acquisitions), divided by the number of months in the period. |
| (4) | Medical School Net Average Ticket (ex-Acquisitions) disclosure is presented beginning with the year ended December 31, 2021 (and future
periods), as information for calculation of this metric is not available for prior periods. |
Key Revenue Drivers – Continuing Education Segment
|
As of and For
the Year Ended December 31, |
|
2022 |
2021 |
2020 |
CONTINUING EDUCATION SEGMENT |
|
|
|
Medical Specialization & Others |
|
|
|
Total Students (end of period) |
4,280 |
3,189 |
4,181 |
Average Total Students |
3,835 |
3,252 |
4,266 |
Average Total Students (ex-Acquisitions) |
3,835 |
3,064 |
4,266 |
Revenue (Total)(in R$ thousands) |
108,806 |
72,983 |
107,196 |
Revenue (ex-Acquisitions)(in R$ thousands)(1) |
108,806 |
70,822 |
107,196 |
| (1) | For the year ended December 31, 2021, “ex-Acquisitions” excludes UniRedentor (for January 2021; closing of the UniRedentor
acquisition was on January 31, 2020). |
Key Revenue Drivers – Digital Services Segment
|
As of and For
the Year Ended December 31, |
|
2022 |
2021 |
2020 |
DIGITAL SERVICES SEGMENT |
|
|
|
Content & Technology for Medical Education |
|
|
|
Medcel Active Payers |
|
|
|
Prep Courses & CME - B2P |
14,569 |
17,171 |
11,316 |
Prep Courses & CME - B2B |
5,887 |
4,460 |
1,723 |
Além da Medicina Active Payers |
6,081 |
— |
— |
Cardio Papers Active Payers |
5,034 |
— |
— |
Medical Harbour Active Payers |
7,668 |
— |
— |
|
|
|
|
Clinical Decision Software |
|
|
|
Whitebook Active Payers |
137,767 |
125,372 |
106,977 |
|
|
|
|
Clinical Management Tools(2) |
|
|
|
iClinic Active Payers |
22,764 |
17,978 |
— |
Shosp Active Payers |
2,915 |
2,305 |
— |
Digital Services Total Active Payers (end of period) |
202,685 |
167,286 |
120,016 |
Revenue (Total)(in R$ thousands) |
189,984 |
151,958 |
93,152 |
Revenue - B2P (in R$ thousands) |
166,515 |
142,716 |
— |
Revenue - B2B (in R$ thousands) |
23,469 |
9,242 |
— |
Revenue (ex-Acquisitions)(in R$ thousands)(1) |
157,943 |
99,003 |
93,152 |
| (1) | “Ex-Acquisitions” figures accounts for revenue received by our acquired companies in a given period only after the date
of their acquisition, i.e. for a period of less than 12 months, and excludes any revenue prior to such date. For the year ended December
31, 2022, “ex-Acquisitions” excludes: iClinic (for January 2022; closing of the iClinic acquisition was in January 2021);
Medicinae (from January to March 2022; closing of the Medicinae acquisition was in March 2021); Medical Harbour (from January to April
2022; closing of the Medical Harbour acquisition was in April 2021); Cliquefarma (from January to April 2022; closing of the Cliquefarma
acquisition was in April 2021); Shosp (from January to May 2022; closing of the Shosp acquisition was in May 2021); RX PRO (from January
to September, 2022; closing of the RX PRO acquisition was in October 2021); and Além da Medicina, Cardiopapers and Glic (all from
January to December, 2022; closing of the Além da Medicina, Cardiopapers and Glic acquisitions only occurred in 2022). For the
year ended December 31, 2021, “ex-Acquisitions” excludes: PEBMED (from January to July 2021; closing of the PEBMED acquisition
was in July 2020); MedPhone (from January to October 2021; closing of the MedPhone acquisition was in November 2020); iClinic (from January
to December 2021; closing of the iClinic acquisition was in January 2021); Medicinae (from March to December 2021; closing of the Medicinae
acquisition was in March 2021); Medical Harbour (from April to December 2021; closing of the Medical Harbour acquisition was in April
2021); Cliquefarma (from April to December 2021; closing of the Cliquefarma acquisition was in April 2021); Shosp (from May to December
2021; closing of the Shosp acquisition was in May 2021); and RX PRO (from October to December 2021; closing of the RX PRO acquisition
was in October 2021). |
| (2) | Clinical management tools include our telemedicine and digital prescription features. |
Key Operational Drivers – Digital Services Segment
– Monthly Active Users (MaU)
|
As of and For
the Year Ended December 31, |
|
2022 |
2021 |
2020 |
DIGITAL SERVICES SEGMENT |
|
|
|
Content & Technology for Medical Education |
16,539 |
16,205 |
14,658 |
Clinical Decision Software |
221,762 |
194,308 |
162,512 |
Clinical Management Tools(1) |
20,936 |
37,030 |
— |
Physician-Patient Relationship |
1,473 |
— |
— |
Total Monthly Active Users (MaU) - Digital Services(2) |
260,710 |
247,543 |
177,170 |
| (1) | Clinical management tools include our telemedicine and digital prescription features and, beginning in the year ended December 31,
2022, excludes users other than payors. |
| (2) | Monthly Active Users (MaU) represents the number of unique individuals that consumed digital services content in each one of our products
in the last 30 days of a specific period, and includes MaU from Shosp, Medicinae, Além da Medicina, Cardipapers and Glic beginning
in the year ended December 31, 2022. |
Revenue and Revenue Mix
|
|
|
|
|
|
|
For the Year
Ended December 31, |
|
2022 |
2022 Ex Acquisitions(1) |
2021 |
% Change |
% Change Ex Acquisitions(1) |
|
(in R$ millions) |
Revenue Mix |
|
|
|
|
|
Undergrad |
2,037.9 |
1,777.5 |
1,498.4 |
36.0% |
18.6% |
Adjusted Undergrad(2) |
2,028.0 |
1,767.6 |
1,531.8 |
32.4% |
15.4% |
Continuing Education |
108.8 |
108.8 |
73.0 |
49.1% |
49.1% |
Digital Services |
190.0 |
157.9 |
152.0 |
25.0% |
3.9% |
Inter-segment transactions |
(7.6) |
(7.6) |
4.0 |
91.6% |
91.6% |
Total Reported Revenue |
2,329.1 |
2,036.6 |
1,719.4 |
35.5% |
18.5% |
| (1) | For the fiscal year ended December 31, 2022, “ex-Acquisitions” excludes: UNIFIPMoc and FIPGuanambi (from January to May,
2022; closing of UNIFIPMoc and FIPGuanambi was in June 2021), UNIGRANRIO (from January to July 2022; closing of UNIGRANRIO was in August
2021), Garanhuns (from January to October, 2022; closing of Garanhuns was in November 2021), iClinic (only January 2022; closing of iClinic
was in January 2021), Medicinae (from January to March 2022; closing of Medicinae was in March 2021), Medical Harbour (from January to
April 2022; closing of Medical Harbour was in April 2021), Cliquefarma (from January to April 2022; closing of Cliquefarma was in April
2021), Shosp (from January to May 2022; closing of Shosp was in May 2021), RX PRO (from January to September, 2022; closing of RX PRO
was in October 2021), and Além da Medicina, Cardiopapers and Glic (all from January to December, 2022; closing of Além da
Medicina, Cardiopapers, and Glic were in 2022). |
| (2) | Includes mandatory discounts in tuition fees granted by state decrees and individual/collective legal proceedings and public civil
proceedings due to COVID 19 on-site class restriction, and excludes any recovery of these discounts that were invoiced based on the decision
by the Brazilian Supreme Court with respect to this matter. |
Exchange Rates
The Brazilian foreign exchange system allows the purchase
and sale of foreign currency and the international transfer of reais by any person or legal entity, regardless of the amount, subject
to certain regulatory procedures.
The real/U.S. dollar exchange rate reported by the
Central Bank was R$4.031 per US$1.00 on December 31, 2019, which reflected a 4.0% depreciation in the real against the U.S. dollar
during 2019. The real/U.S. dollar exchange rate reported by the Central Bank was R$5.196 per US$1.00 on December 31, 2020, which
reflected a 28.9% depreciation in the real against the U.S. dollar during 2020. As of
December 31, 2021, the exchange rate for the sale of U.S. dollars as reported by the Central Bank was R$5.580 per US$1.00, which reflected
a 7.3% depreciation in the real against the U.S. during 2021. On December 31, 2022, the exchange rate of U.S. dollar as reported by the
Central Bank was R$5.218 per US$1.00, which reflected a 6.5% appreciation in the real against the U.S. dollar since December 31, 2021.
As of April 26, 2023, the exchange rate for the sale of U.S. dollars as reported by the Central Bank was R$5.059 per US$1.00, which reflected
an appreciation of 3.1% in the real against the U.S. dollar since December 31, 2022. There can be no assurance that the real will not
again depreciate or appreciate against the U.S. dollar or other currencies in the future.
The Central Bank has intervened occasionally in the foreign
exchange market to attempt to control instability in foreign exchange rates. We cannot predict whether the Central Bank or the Brazilian
government will continue to allow the real to float freely or will intervene in the exchange rate market by re-implementing a currency
band system or otherwise. The real may depreciate or appreciate substantially against the U.S. dollar in the future. Furthermore,
Brazilian law provides that, whenever there is a serious imbalance in Brazil’s balance of payments or there are serious reasons
to foresee a serious imbalance, temporary restrictions may be imposed on remittances of foreign capital abroad. We cannot assure you that
the Brazilian government will not place restrictions on remittances of foreign capital abroad in the future.
The following table sets forth, for the periods indicated,
the high, low, average and period-end exchange rates for the purchase of U.S. dollars expressed in Brazilian reais per U.S. dollar.
The monthly and annual average rates are calculated by using the average of reported exchange rates by the Central Bank on each day during
a monthly period and on the last day of each month during an annual period, respectively.
Year |
Period-end |
Average(1) |
Low(2) |
High(3) |
2018 |
3.875 |
3.656 |
3.139 |
4.188 |
2019 |
4.031 |
3.946 |
3.652 |
4.260 |
2020 |
5.196 |
5.158 |
4.021 |
5.937 |
2021 |
5.580 |
5.395 |
4.920 |
5.839 |
2022 |
5.218 |
5.165 |
4.618 |
5.704 |
Source: Central Bank.
| (1) | Represents the average of the exchange rates on the closing of each day during the year. |
| (2) | Represents the minimum of the exchange rates on the closing of each day during the year. |
| (3) | Represents the maximum of the exchange rates on the closing of each day during the year. |
Month |
Period-end |
Average(1) |
Low(2) |
High(3) |
October 2022 |
5.345 |
5.250 |
5.141 |
5.345 |
November 2022 |
5.294 |
5.275 |
5.036 |
5.466 |
December 2022 |
5.218 |
5.242 |
5.145 |
5.341 |
January 2023 |
5.099 |
5.201 |
5.077 |
5.446 |
February 2023 |
5.208 |
5.172 |
4.990 |
5.253 |
March 2023 |
5.080 |
5.211 |
5.080 |
5.298 |
April 2023 (through April 26, 2023) |
5.059 |
5.021 |
4.910 |
5.083 |
Source: Central Bank.
| (1) | Represents the average of the exchange rates on the closing of each day during the month. |
| (2) | Represents the minimum of the exchange rates on the closing of each day during the month. |
| (3) | Represents the maximum of the exchange rates on the closing of each day during the month. |
B. Capitalization and Indebtedness
Not applicable.
C. Reasons for the Offer and
Use of Proceeds
Not applicable.
D. Risk Factors
Summary of Risk Factors
An investment in our Class A common shares is subject
to a number of risks, including risks relating to our business and industry, risks relating to Brazil and risks relating to our Class
A common shares. The following list summarizes some, but not all, of these risks. Please read the information in the section entitled
“Risk Factors” for a more thorough description of these and other risks.
Certain Risks Relating to Our Business and Industry
| · | We may not be able to identify and acquire new medical higher education institutions or meet our strategic and financial goals
in connection with any business acquisition we seek, and difficulties in effectively integrating and managing a growing number of acquisitions
may adversely affect our strategic objectives. We expect to continue to acquire medical higher education institutions and healthtech
companies as part of our strategy to expand our operations, including through acquisitions that may be material in size and/or of strategic
relevance. We cannot assure you that we will continue to be able to identify post-secondary education institutions focused on medicine
that provide suitable acquisition opportunities, or to acquire such institutions on favorable terms when necessary. In addition, we may
face significant challenges in the process of integrating the operations of any acquired companies with our existing business, such as
the inability to manage a greater number of geographically dispersed employees and create and implement efficient uniform controls, procedures
and policies, in addition to the incurrence of high or unexpected integration costs. |
| · | We may require additional funds to continue our expansion strategy. If we are unable to obtain adequate financing on favorable
terms to complete any potential acquisition and implement our expansion plans, our growth strategy may be materially and adversely affected.
If adequate funds are not available or are not available on acceptable terms, we may not be able to fund our expansion, take advantage
of acquisition opportunities, develop or enhance our portfolio of products and services or respond to competitive pressures, which could
have a material adverse effect on our business, results of operations and financial condition. |
| · | Our revenues are highly concentrated in the tuition fees we charge for our medical courses and other health sciences programs,
and any economic, market or regulatory factors adversely affecting such medical courses and health sciences programs could lead to decreased
demand in the medical and health courses we offer, which could materially adversely affect us. Economic, market or regulatory factors
affecting either the amount of tuition fees we are able to charge for the medical courses and health sciences programs we offer or the
ability of our students to pay such tuition fees could result in significantly decreased demand for our services. |
| · | Changes to the rules or delays or suspension of tuition payments made through FIES may adversely affect our cash flows and our
business. We are subject to the risks associated with delays in the transfer of monthly tuition payments from the FIES program operated
by the Brazilian federal government, as well as to changes to the rules to renew FIES contracts. |
| · | If we lose the benefits of federal tax exemptions provided under the PROUNI program, our business, financial condition and results
of operations may be materially adversely affected. We may be disqualified from the PROUNI program and lose our tax exemptions if
we do not comply with certain requirements, such as providing total or partial scholarships for a percentage of students who paid their
tuition in the previous year, granting partial scholarships, and submitting to MEC semi-annual records of attendance, achievement and
dropout of students receiving scholarships, among others. |
| · | Our operating history as a consolidated company, our recent acquisitions and the comparability of our results may make it difficult
for investors to evaluate our business, financial condition, results of operations and prospects. Because the historical information included elsewhere
in this annual report may not be representative of our results as a consolidated company, investors may have limited financial information
on which to evaluate us, their investment decision and our prior performance. |
| · | An increase in delays and/or defaults in the payment of tuition fees may adversely affect our income and cash flows. We depend
on the full and timely payment of the tuition we charge our students, including tuition payments we receive through FIES, which is largely
outside of our control. |
Certain Risks Relating to Brazil
| · | The Brazilian federal government has exercised, and continues to exercise, significant influence over the Brazilian economy. This
involvement as well as Brazil’s political and economic conditions could harm us and the price of our Class A common shares. The
Brazilian government’s actions to control inflation and other policies and regulations have often involved, among other measures,
increases or decreases in interest rates, changes in fiscal policies, wage and price controls, foreign exchange rate controls, blocking
access to bank accounts, currency devaluations, capital controls and import and export restrictions. Uncertainty over whether the Brazilian
federal government will implement reforms or changes in policy or regulation affecting these or other factors in the future may affect
economic performance and contribute to economic uncertainty in Brazil. |
| · | Economic uncertainty and political instability in Brazil may harm our business and the price of our Class A common shares. Political
crises have affected and continue to affect the confidence of investors and the general public, which have historically resulted in economic
deceleration and heightened volatility in the securities offered by companies with significant operations in Brazil. |
| · | Inflation and certain measures by the Brazilian government to curb inflation have historically harmed the Brazilian economy and
Brazilian capital markets, and high levels of inflation in the future would harm our business and the price of our Class A common shares.
Inflation, policies adopted to curb inflationary pressures and uncertainties regarding possible future governmental intervention have
contributed to economic uncertainty and heightened volatility in the Brazilian capital markets. |
| · | Exchange rate instability may have adverse effects on the Brazilian economy, us and the price of our Class A common shares. The
Brazilian government has implemented various economic plans and used various exchange rate policies, including sudden devaluations, periodic
mini-devaluations (during which the frequency of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate
markets and a floating exchange rate system. In addition, domestic and international reactions to restrictive economic policies could
have a negative impact on the Brazilian economy. |
| · | Infrastructure and workforce deficiency in Brazil may impact economic growth and have a material adverse effect on us. Growth
is limited by inadequate infrastructure, including potential energy shortages and deficient transportation, logistics and telecommunication
sectors, general strikes, the lack of a qualified labor force, and the lack of private and public investments in these areas, which limit
productivity and efficiency. |
| · | Developments and the perceptions of risks in other countries, including other emerging markets, the United States and Europe, may
harm the Brazilian economy and the price of our Class A common shares. The market for securities offered by companies with significant
operations in Brazil is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin
American and emerging markets, as well as the United States, Europe and other countries. To the extent the conditions of the global markets
or economy deteriorate, the business of companies with significant operations in Brazil may be harmed. |
Certain Risks Relating to Our Class A Common Shares
| · | An active trading market for our Class A common shares may not be sustainable. If an active trading market is not maintained, investors
may not be able to resell their shares and our ability to raise capital in the future may be impaired. Although our Class A common
shares are listed and being traded on the Nasdaq Global Select Market, an active trading market for our shares may not be maintained.
The stock market in general has experienced substantial price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of particular companies affected. |
| · | The concentration of ownership and voting power in Bertelsmann, our controlling shareholder, limits your ability to influence corporate
matters. Bertelsmann, our controlling shareholder, owns 63.5% of our outstanding Class B common shares as of the date of this annual
report, which, together with its ownership of 20.4% of our outstanding Class A common shares, represent approximately 41.5% of our issued
share capital and 59.4% of the voting power of our issued share capital, and, together with the Esteves Family, controls all matters requiring
shareholder approval. This concentration of ownership and voting power limits your ability to influence corporate matters. The decisions
of Bertelsmann and the Esteves Family on these matters may be contrary to your expectations or preferences, and they may take actions
that could be contrary to your interests. So long as Bertelsmann and the Esteves Family continue to beneficially own a sufficient number
of Class B common shares, even if they beneficially own significantly less than 50% of our outstanding share capital, acting together,
they will be able to effectively control the outcome of all decisions at our shareholders’ meetings. |
| · | Class A common shares eligible for future sale may cause the market price of our Class A common shares to drop significantly. The
market price of our Class A common shares may decline as a result of sales of a large number of our Class A common shares in the market
(including Class A common shares issuable upon conversion of Class B common shares) or the perception that these sales may occur. Our
shareholders or entities controlled by them or their permitted transferees will be able to sell their shares in the public market from
time to time without registering them, subject to certain limitations on the timing, amount and method of those sales imposed by regulations
promulgated by the SEC. |
| · | Our Articles of Association contain anti-takeover provisions that may discourage a third party from acquiring us and adversely
affect the rights of holders of our Class A common shares. Our Articles of Association contain certain provisions that could limit
the ability of others to acquire our control, including a provision that grants authority to our board of directors to establish and issue
from time to time one or more series of preferred shares without action by our shareholders and to determine, with respect to any series
of preferred shares, the terms and rights of that series. |
| · | If securities or industry analysts publish inaccurate or unfavorable research, about our business, the price of our Class A common
shares and our trading volume could decline. The trading market for our Class A common shares will depend in part on the research
and reports that securities or industry analysts publish about us, our business, our market or our competitors. In the event one or more
of the analysts who covers us downgrades us or releases negative publicity about our Class A common shares, our share price would likely
decline. |
| · | It is unlikely that we will declare any dividends on our common shares in the foreseeable future and therefore, you must rely on
price appreciation of our common shares for a return on your investment. We do not anticipate paying any dividends in the foreseeable
future. Instead, we intend to retain earnings, if any, to fund the operation of our business and future growth. Any decision to declare
and pay dividends in the future will be made at the discretion of our general meeting of shareholders, acting pursuant to a proposal by
our board of directors, or by our board, and will depend on, among other things, our results of operations, cash requirements, financial
condition, contractual restrictions and other factors. |
| · | There can be no assurance that we will not be a passive foreign investment company, or PFIC, for any taxable year, which could
subject United States investors in our Class A common shares to significant adverse U.S. federal income tax consequences. Based on
the composition of our income and assets and the value of our assets, including goodwill (the implied value of which we estimate based
on the price of our Class A common shares), we believe that we were not a PFIC for the taxable year of 2022. However, because we hold
a substantial amount of cash (relative to the assets shown on our balance sheet) and because our PFIC status for any taxable year will
depend on the composition of our income and assets and the value of our assets from time to time (which may be determined, in part, by
reference to the market price of our Class A common shares, which could be volatile), there can be no assurance that we will not be a
PFIC for any taxable year. |
Certain Risks Relating to Our Business and Industry
We may not be able to identify and acquire new medical
higher education institutions or meet our strategic and financial goals in connection with any business acquisition we seek, and difficulties
in effectively integrating and managing a growing number of acquisitions may adversely affect our strategic objectives.
We expect to continue to acquire medical higher education
institutions, as part of our strategy to expand our operations, including through acquisitions that may be material in size and/or of
strategic relevance, and healthtech companies, as part of our strategy to become the partner of choice for every physician in Brazil not
only through educational products, but also providing digital services relevant to their daily routine. We cannot assure you that we will
continue to be able to identify post-secondary education institutions focused on medicine that provide suitable acquisition opportunities,
or to acquire such institutions on favorable terms when necessary.
In addition, our previous and any future acquisitions
involve a number of risks and challenges that may have a material adverse effect on our business and results, including the following:
| · | the acquisition may not contribute to our commercial strategy or the image of our institution; |
| · | a future acquisition may be subject to approval by Brazil’s Administrative Council for Economic Defense (Conselho Administrativo
de Defesa Econômica, or CADE) or other regulatory authorities, which may deny the necessary approvals for, or impose conditions
or restrictions on, the acquisition; |
| · | we may face contingent and/or successor liabilities (either currently known or unknown to us) in connection with, among others things,
(i) judicial and/or administrative proceedings of the acquired institutions, including but not limited to, regulatory, tax, labor,
social security, environmental and intellectual property proceedings, and (ii) financial, reputational and technical issues, including
with respect to accounting practices, financial statement disclosures and internal controls, as well as other regulatory matters, all
of which may not be sufficiently indemnifiable under the relevant acquisition agreement; |
| · | the acquisition process may require additional funds and/or may be time-consuming, and the attention of our management may be diverted
from their day-to-day responsibilities and our operations; |
| · | our investments in acquisitions may not generate the expected returns, and we may mismanage administrative and financial resources
as part of the integration process; |
| · | the business model of the institutions we acquire may differ from ours, and we may be unable to adapt them to our business model or
do so efficiently; |
| · | we may not be able to integrate efficiently and successfully the operations of the institutions we acquire, including their personnel,
financial systems, distribution or operating procedures; |
| · | certain acquisitions may impact our financial reporting obligations and the preparation of our consolidated financial statements,
resulting in delays to such preparation; |
| · | the acquisitions may generate goodwill, the impairment of which will result in the reduction of our net income and dividends, and
our financial statements may be affected as a result of the application of our accounting policies to the results of our acquisitions; |
| · | the transfer of management of the target institution resulting from a change of control or corporate restructuring must be notified
to the MEC within 60 days from the consummation of the acquisition, and MEC may impose additional restrictions on its reaccreditation;
and |
| · | we may be unable to provide the acquired company with the necessary resources to support its operations and if, by the time of the
reaccreditation of the acquired company with the MEC, the MEC finds that we have failed to meet any applicable reaccreditation requirements,
it may impose additional restrictions or conditions on the reaccreditation of the acquired company. |
In addition, we may face significant challenges in the
process of integrating the operations of any acquired companies with our existing business, such as the inability to manage a greater
number of geographically dispersed employees and create and implement efficient uniform controls, procedures and policies, in addition
to the incurrence of high or unexpected integration costs. As of the date of this
annual report: (i) we have fully integrated the operations of 20 of our acquisitions; and (ii) we are in the process of integrating the
operations of another 10 of our acquisitions with our existing business, namely, Shosp, Cliquefarma, Medical Harbour, Medicinae, iClinic,
RX PRO, Além da Medicina, Cardiopapers, Glic and DelRey. The anticipated benefits of the acquisitions we may pursue will not be
achieved unless we successfully and efficiently integrate the acquired companies into our operations and effectively manage, market and
apply our business strategy to them. We may also be unable to integrate faculty and personnel with different professional experiences
and from different corporate cultures, and our relationship with current and new employees, including professors, may be impaired.
We may require additional funds to continue our expansion
strategy. If we are unable to obtain adequate financing on favorable terms to complete any potential acquisition and implement our expansion
plans, our growth strategy may be materially and adversely affected.
In the future, we may need to raise additional capital
to fund our expansion (organically or through strategic acquisitions), to obtain new licenses or develop new or enhanced products or services
or to respond to competitive pressures. Our ability to raise additional funds will depend on financial, economic and other factors, many
of which are beyond our control. For example, financial markets have been negatively impacted by the COVID-19 pandemic and current macroeconomic
trends, including high interest rates, rising inflation, and more recently, the government closures of Silicon Valley Bank and Signature
Bank and liquidity concerns at other financial institutions, and concerns regarding the potential for local and/or global economic recession.
Adequate funding may not be available on terms favorable to us or at all, particularly in light of these conditions. If adequate funds
are not available or are not available on acceptable terms, we may not be able to fund our expansion, take advantage of acquisition opportunities,
develop or enhance our portfolio of products and services or respond to competitive pressures, which could have a material adverse effect
on our business, results of operations and financial condition. If we raise additional funds through the issuance of equity or convertible
debt securities, our shareholders will experience dilution and the securities that we issue may have rights, preferences and privileges
senior to those of our shares.
Moreover, any additional funds raised through debt financing
will likely require our compliance with restrictive covenants that impose operating and financial restrictions on us, including restrictions
on our ability to incur additional indebtedness, create liens, make acquisitions, dispose of assets and make restricted payments, among
others. In addition, such indebtedness may require us to maintain certain financial ratios. These restrictions may limit our ability to
obtain future financings, to withstand a future downturn in our business or the economy in general, or to otherwise conduct necessary
corporate activities. A breach of any such covenant would likely result in a default under the applicable agreement, which, if not waived,
could result in acceleration of the indebtedness outstanding. For more information, see “Item 5. Operating and Financial Review
and Prospects—B. Liquidity and Capital Resources—Indebtedness.”
Our revenues are highly concentrated in the tuition fees
we charge for our medical courses and other health sciences programs, and any economic, market or regulatory factors adversely affecting
such medical courses and health sciences programs could lead to decreased demand in the medical and health courses we offer, which could
materially adversely affect us.
A significant portion of our historical undergraduate
programs combined tuition fees are currently concentrated in the tuition fees we charge for our medical courses and other health sciences
programs across our network. For the years ended December 31, 2022, 2021 and 2020, 89.9%, 88.0% and 86.0%, respectively, of total historical
undergraduate programs combined tuition fees were derived from tuition fees we or our subsidiaries charged for medical courses and other
health sciences programs. Therefore, economic, market or regulatory factors affecting either the amount of tuition fees we are able to
charge for the medical courses and health sciences programs we offer or the ability of our students to pay such tuition fees could result
in significantly decreased demand for our services, which could materially adversely affect us.
Changes to the rules or delays or suspension of tuition
payments made through FIES may adversely affect our cash flows and our business.
Some of our students finance their tuition fees through
the Higher Education Student Financing Fund (Fundo de Financiamento ao Estudante do Ensino Superior, or FIES) created by the Brazilian
federal government, and operated through the National Fund for Educational Development (Fundo Nacional de Desenvolvimento da Educação,
or FNDE), which offers financing to low-income students enrolled in undergraduate programs in private higher education institutions. As of 2018, we have adhered to the “New
FIES,” a new federal program aimed at providing student financing. Similar to the FIES, the New FIES provides financial support
for low-income students throughout Brazil, in particular in the North, Northeast and Midwest regions. As a result, our exposure to the
risks associated with delays in the transfer of monthly tuition payments from the FIES program operated by the Brazilian federal government,
which we calculate by dividing the sum of the historical undergraduate programs combined tuition fees financed through FIES by total historical
undergraduate programs combined tuition fees, was 8.3%, 8.0% and 11.8% of total historical undergraduate programs combined tuition fees
as of December 31, 2022, 2021 and 2020, respectively.
Should (i) the Brazilian federal government terminate
or reduce the transfer of monthly payments to our institutions that participate in FIES or New FIES, (ii) the students benefiting
from FIES or New FIES fail to meet the requirements for enrollment in the programs or (iii) the Brazilian federal government extend
the term to make reimbursements under FIES or New FIES or adversely change their rules, our results of operations and cash flow may be
materially adversely affected. We may also experience a decline in revenues and a decline in the number of students at our campuses from
the FIES and the New FIES programs.
Moreover, recent changes to the rules to renew FIES contracts,
as well as the shutdown of the system to enter into new student financing agreements, may negatively affect the number of students enrolled
in our courses, causing a reduction in our revenues. For more information regarding the changes to FIES contracts, see “Item 4.
Information on the Company—Business Overview—Regulatory Overview.”
If we lose the benefits of federal tax exemptions provided
under the PROUNI program, our business, financial condition and results of operations may be materially adversely affected.
Some of our students participate in the University for
All Program (Programa Universidade para Todos, or PROUNI program). Through the PROUNI program, the Brazilian federal government
grants a number of full and partial scholarships to low-income post-secondary education students. As a result of our participation in
the PROUNI program, we benefit from certain federal tax exemptions relating to bachelor’s and associate’s degree programs,
such as (i) income tax, (ii) Social Contribution Tax on Gross Revenue (Programa de Integração Social, or
PIS), (iii) Social Security Financing Tax on Gross Revenue (Contribuição para o Financiamento da Seguridade Social,
or COFINS), and (iv) Social Contribution Tax on Net Profit (Contribuição Social sobre o Lucro Líquido,
or CSLL), regarding our revenues from undergraduate and associate programs.
We may be disqualified from the PROUNI program and lose
our tax exemptions if we do not comply with certain requirements, such as providing total or partial scholarships for a percentage of
students who paid their tuition in the previous year, granting partial scholarships, and submitting to MEC semi-annual records of attendance,
achievement and dropout of students receiving scholarships, among others. See “Item 4. Information on the Company—Business
Overview—Regulatory Overview.” If we lose our tax exemptions or are unable to comply with other, more stringent requirements
that may be introduced in the future, our business, financial condition and results of operations could be materially adversely affected.
There is a risk that additional changes in tax laws may
prohibit, interrupt or modify the use of existing tax exemptions, and we cannot assure you that we will fully maintain such tax and other
benefits related to PROUNI in the event the tax laws are amended further. Any suspension, accelerated default, repayment or inability
to renew our tax exemptions may have an adverse effect on our results of operations. As of the date of this annual report, there are two
main proposed tax law amendments that are under review by the Brazilian congress: (i) Bill No. 3,887/2020, which expressly revokes
the PIS and COFINS tax exemptions for the PROUNI program; and (ii) Constitutional Amendment Proposal No. 45/2020, which proposes
a new tax to substitute PIS and COFINS (and other state and municipal taxes) with no tax exemptions. If we lose our tax exemptions and
incentives, if we are unable to comply with future requirements or if changes in the law limit our ability to maintain these tax benefits,
our business, financial condition and results of operations may be significantly and adversely affected.
Our operating history as a consolidated company, our
recent acquisitions and the comparability of our results may make it difficult for investors to evaluate our business, financial condition,
results of operations and prospects.
Our operating history as a consolidated company and recent
acquisitions may make it difficult for you to evaluate our business, financial condition, results of operations and prospects. Because
the historical information included elsewhere in this annual report may not be representative of our
results as a consolidated company, investors may have limited financial information on which to evaluate us, their investment decision
and our prior performance. Our results of operations for the year ended December 31, 2022 are not directly comparable to our results of
operations for the year ended December 31, 2021, and our results of operations for the year ended December 31, 2021 are not directly comparable
to our results of operations for the year ended December 31, 2020, due to the effects of the acquisition of the Acquired Companies. Our
ability to forecast our future operating results, including revenue, cash flows and profitability, as well as the operational inefficiencies
that we may face as we continue to integrate the Acquired Companies, is limited and subject to a number of uncertainties. Moreover, past
performance is no assurance of future returns.
We do not currently control some of our equity investments,
which could adversely affect our ability to commercialize our products.
We acquire interests in third parties for the expansion,
development or commercialization of our products. Currently, we have a 30.0% interest in UEPC, a medical school located in the Federal
District that offers higher education and post-graduate courses, both in person and through long-distance learning. We do not currently
have a controlling interest in UEPC and any disagreements or disputes with these or any other companies where we have or in which we may
decide to acquire a minority interest could adversely affect our ability to develop and commercialize our products and, in turn, our financial
condition and results of operations. The failure to continue any investment arrangement or to resolve disagreements with current or future
companies where we have a minority interest could materially and adversely affect our ability to transact the business that is the subject
of such investment arrangement, which would in turn negatively affect our financial condition and results of operations.
The interests of our management team may be focused on
the short-term market price of our Class A common shares, which may not coincide with your interests. In addition, our shareholders may
suffer dilution of their interests in our share capital and in the value of their investments due to the issuance of new shares for settlement
of our share-based incentive plans.
Our directors and officers, among others, own shares
issued by us and are beneficiaries under our stock option plans. Our current stock option plan for our managers and employees was approved
in August 2019 (as amended in July 2020 and July 2022), and reserved up to 4% of our common shares at any time (excluding treasury shares)
for issuance under this new equity incentive plan. In addition, on July 8, 2022, we created a restricted stock units plan and reserved
up to 1.2% of our common shares at any time for issuance under this new plan. See “Item 6. Directors, Senior Management and Employees—B.
Compensation—New Long-Term Incentive Plan.”
Due to the issuance of stock options or restricted shares
to members of our management team, a significant portion of their compensation is closely tied to our results of operations and, more
specifically to the trading price of our Class A common shares, which may lead such individuals to direct our business and conduct our
activities with an emphasis on short-term profit generation. As a result of these factors, the interests of our management team may not
coincide with the interests of our other shareholders that have longer-term investment objectives.
Once the options have been exercised by the participants
and/or the common shares to be issued under the restricted stock units plan have vested, our board of directors will determine whether
our capital stock should be increased through the issuance of new shares to be subscribed by participants, or if they will be settled
through shares held in treasury. In the event settlement occurs through the issuance of new shares, our shareholders will suffer dilution,
of their interests in our share capital and in the value of their investments, up to a maximum of 5.2% of our common shares at any time.
In case of new stock option grants, whether under existing
plans or new plans that may be approved by our shareholders at the shareholders’ meeting, our shareholders will be subject to additional
dilution. For additional information on our stock option plan, see “Item 6. Directors, Senior Management and Employees—B.
Compensation of Directors and Officers” for additional information.
An increase in delays and/or defaults in the payment
of tuition fees may adversely affect our income and cash flows.
We depend on the full and timely payment of the tuition
we charge our students, including tuition payments we receive through FIES. Adverse changes in the macroeconomic environment and the earnings
capacity of our students, may lead to an increase in payment delinquency or default by our
students and negatively impact our ability to collect our accounts receivable. An increase in payment delinquency or default by our students
may have a material adverse effect on our cash flows and our business, including our ability to meet our obligations. Our allowance for
doubtful accounts expenses as a percentage of our revenue was 1.8%, 2.8% and 2.7% for the years ended December 31, 2022, 2021 and 2020,
respectively. There is no guarantee that our allowance for doubtful accounts expenses will not increase in the following years. Our inability
to collect our accounts receivable on a timely basis, if at all, could cause our allowance for doubtful accounts expenses to increase
in the future, and materially and adversely affect our financial condition, liquidity and results of operations.
Difficulties in identifying, opening and efficiently
managing new campuses or in obtaining regulatory authorizations and accreditations on a timely basis as part of our organic growth strategy
may adversely affect our business.
Our organic strategy includes expanding by opening new
campuses and integrating them into our educational network. This growth plan creates significant challenges in terms of maintaining our
teaching quality and culture, as a result of the complexity and difficulty of effectively managing a greater number of campuses and programs.
If we are unable to maintain our current quality standards, we may lose market share and be adversely affected.
Establishing new campuses poses important challenges
and requires us to make significant investments in infrastructure, marketing, personnel and other pre-operational expenses, mainly identifying
new sites for lease or purchase. We prioritize identifying strategic sites, negotiating the purchase or lease of properties, building
or refurbishing facilities (including libraries, laboratories and classrooms), obtaining local permits, hiring and training faculty and
staff, and investing in administration and support.
We are also required to register our new campuses with
MEC, before opening and operating them, as well as having our new programs accredited by MEC in order to issue official degrees and certificates
to our students. If we do not succeed in identifying and establishing our campuses in a cost-effective manner or in obtaining such authorizations
or accreditations on a timely basis, or if MEC imposes restrictions or conditions on our accreditation requests for new campuses, our
business may be adversely affected.
We may not be able to successfully expand our presence
and performance in the distance learning business.
We may face difficulties in successfully operating our
distance learning program and in implementing and investing in the technologies necessary to operate a successful distance learning program,
where the technological needs, the expectations of our customers and market standards change rapidly. We have to quickly modify our products
and services to adapt to new distance learning technologies, practices and standards. We may be adversely affected if current or future
competitors introduce products or service platforms that are superior to those we offer, or if our resources are not adequate to develop
and adapt our technological capabilities rapidly enough to maintain our competitive position.
In addition, the success of our distance learning programs
depends on the general population having easy and affordable access to the internet, as well as on other technological factors that are
outside of our control. If the internet becomes inaccessible or access costs increase to levels higher than current prices, or if the
number of students interested in distance learning educational methods does not increase, we may be unable to successfully implement our
distance learning program strategy, which would have an adverse effect on our growth strategy.
We face significant competition in each program we offer
and each geographic region in which we operate. If we fail to compete efficiently, we may lose market share and our profitability may
be adversely affected.
We compete with various public and private post-secondary
education institutions, including distance learning institutions. Our competitors may offer programs or courses similar to or better than
those offered by us, have access to more funds, be more prestigious or well-regarded within the academic community, have more conveniently
located campuses with better infrastructure, or charge lower tuition.
On April 5, 2018, MEC issued Ordinance No. 328/18, pursuant
to which, among other measures, MEC imposed a five-year suspension on the granting of authorizations for the creation of new medical education
courses. However, on April 5, 2023, MEC issued Ordinance No. 650/23, which revoked the suspension under Ordinance No. 328/18 and set new
rules for the opening of new medicine courses. In particular, MEC will be required to conduct a public call for new courses, i.e., through
the Mais Médicos program pursuant to Law No. 12,871/2013, and subject any such courses to the prior review by the Interministerial Commission
for Health Education Management (Comissão Interministerial de Gestão da Educação na Saúde).
By August 4, 2023, MEC must commence this public call and set the rules, procedures, decision-making standards and the calendar in connection
with the fulfillment of medicine course vacancies. As new medicine courses are authorized by MEC pursuant to this revised standard, or
to the extent MEC further repeals restrictions set on new medicine courses or the fulfillment of medicine course vacancies, this will
result in the creation of new medical education courses or medicine course vacancies, which will in turn increase competition. As a result,
we may be required to reduce our tuition fees or increase our operating expenses (including our costs per student) in order to retain
or attract students or to pursue new market opportunities, and reduce our ability to fill all our medical seats capacity.
In addition, although Ordinance No. 650/23 requires a
public call prior to the authorization of a new medicine course, some educational institutions have been judicially challenging this restriction
before Brazilian courts to compel MEC to receive and review requests for new medicine courses outside the Mais Médicos program
rules by alleging that these rules are an undue restriction on freedom of competition. Certain courts may ultimately compel the MEC to
receive and review these requests. For instance, Declaratory Action of Constitutionality (Ação Declaratória de
Constitucionalidade) No. 81 was filed by the Brazilian National Association of Private Universities (Associação Nacional
das Universidades Particulares) before the Brazilian Supreme Court to discuss the validity of these restrictions. Should the Brazilian
Supreme Court rule against the validity of these restrictions, we may be required to reduce our tuition or increase our operating expenses
(including our costs per student) in order to compete effectively, retain or attract students or to pursue new market opportunities. Furthermore,
we were awarded, seven new undergraduate campuses as part of the Mais Médicos program, all of which are located in remote
regions of Brazil and which operations are subject to the verification by the MEC of the satisfactory implementation by Afya Brazil of
all regulatory requirements. We cannot assure you that there will be sufficient student demand to fill all medical school seats available
at such campuses.
As a result of the foregoing, our revenues and profitability
may decrease. We cannot assure you that we will be able to compete successfully against our current or future competitors. If we are unable
to maintain our competitive position or otherwise respond to competitive pressures effectively, we may lose our market share, our profits
may decrease and we may be adversely affected.
We may not be able to update, improve or offer the content
of our existing programs to our students on a cost-effective basis, which may materially adversely affect our ability to attract and retain
students.
To differentiate ourselves and remain competitive, we
must continually update our courses and develop new educational programs, including through the adoption of new technological tools. Updates
to our current courses and the development of new educational programs may not be readily accepted by our students or by the market. Also,
we may not be able to introduce new educational programs at the same pace as our competitors or at the pace required by the labor market.
If we do not adequately modify our educational programs in response to market demand, whether due to financial restrictions, unusual technological
changes or otherwise, our ability to attract and retain students may be impaired and we may be materially adversely affected.
If we continue to grow, we may not be able to appropriately
manage the expansion of our business and staff, the increased complexity of our software and platforms, or grow in our addressable market.
We are currently experiencing a period of significant
expansion and are facing a number of expansion-related issues, such as the acquisition and retention of experienced and talented personnel,
cash flow management, corporate culture and efficacy of internal controls, among others. These issues and the significant amount of time
spent on addressing them may result in the diversion of our management’s attention from other business issues and opportunities.
In addition, we believe that our corporate culture and values are critical to our success, and we have invested a significant amount of
time and resources building them. If we fail to preserve our corporate culture and values, our ability to recruit, retain and develop
personnel and to effectively implement our strategic plans may be harmed.
We must constantly update our software, enhance and improve
our billing, transaction and other business systems, and add and train new software designers and engineers, as well as other personnel.
This process is time intensive and expensive, and may lead to higher costs in the future. Furthermore, we may need to enter into relationships
with various strategic partners other online service providers and other third parties necessary to our business. The increased complexity of managing multiple commercial relationships
could lead to execution problems that can affect current and future revenues, and operating margins.
We cannot assure you that our current and planned platform
and systems, procedures and controls, personnel and third-party relationships will be adequate to support our future operations. In addition,
our current expansion has placed significant strain on management and on our operational and financial resources, and this strain is expected
to continue. Our failure to manage growth effectively could seriously harm our business, results of operations and financial condition.
The ability to attract, recruit, retain and develop key
personnel and qualified employees is critical to our success and growth. If we lose key personnel, our business, financial condition and
results of operations may be adversely affected.
In order for us to successfully compete and grow, we
must attract, recruit, retain and develop the necessary personnel who can provide the needed expertise across the entire spectrum of our
intellectual capital needs. While we have a number of our key personnel who have substantial experience with our operations, we must also
develop our personnel to provide succession plans capable of maintaining continuity in the midst of the inevitable unpredictability of
human capital. However, the market for qualified personnel is competitive, and we may not succeed in recruiting additional personnel or
may fail to effectively replace key current personnel who depart with qualified or effective successors. We must continue to hire additional
personnel to execute our strategic plans. Our effort to retain and develop personnel may also result in significant additional expenses,
which could adversely affect our profitability. We cannot assure you that qualified employees will continue to be employed, that we will
manage them successfully, or that, in the future, we will be able to attract qualified personnel with similar skills and expertise at
equivalent cost and retain them.
We are also dependent upon the ability and experience
of a number of our key personnel who have substantial experience with our operations. Many of our key personnel have worked for us for
a significant amount of time or were recruited by us specifically due to their industry experience. It is possible that the failure to
retain or attract the services of one or a combination of our senior executives, board members (including those with M&A experience
related to our industry), or key managers, could have a material adverse effect on our business, financial condition and results of operations.
Any increase in
the attrition rates of students in our education programs may adversely affect our results of operations.
We believe that
our attrition rates are primarily related to the personal motivation and financial situation of our current and potential students, as
well as to socioeconomic conditions in Brazil. Significant changes in future attrition rates and/or failure to re-enroll may affect our
enrollment numbers, such as in the context of economic uncertainty or volatility, and may
have a material adverse effect on our revenues and our results of operations.
Public health outbreaks, epidemics or pandemics, such
as the COVID-19 pandemic, have adversely affected and may continue to adversely affect our business.
Public health outbreaks, epidemics or pandemics, such
as the COVID-19 pandemic, could materially adversely impact our business. For instance, on March 11, 2020, the World Health Organization
declared the COVID-19 outbreak a pandemic, which led to interruptions of our on-campus activities to varying degrees, with a significant
portion of our nonpractical educational activities being temporarily offered through our online platform (rather than on-site), and the
calendar of our practical educational activities being rescheduled to when authorities allowed on-campus activities to resume. As of the
date of this annual report, all lockdown restrictions have been revoked by Brazilian authorities in our campus locations and we successfully
resumed our on-campus activities and classes.
In addition, during 2020, certain Brazilian
states issued decrees granting mandatory discounts to our students because of the COVID-19 pandemic. These mandatory discounts were suspended
as their constitutionality was challenged before the Brazilian superior courts. On November 18, 2021, the Brazilian Supreme Court decided,
by a majority vote, that any judicial decisions rendered in lawsuits that granted linear discounts in monthly tuition fees for private
universities as a result of the COVID-19 pandemic were unconstitutional. Therefore, we ceased to apply linear discounts on any active
monthly tuition fees that are related to the effects of the COVID-19 pandemic and, as of December 31, 2022, were in the process of charging
back these discounted amounts from students that had benefitted from these unconstitutional decisions, in light
of the final decision rendered by the Brazilian Supreme Court. For the year ended December 31, 2022, we have invoiced R$9.9 million from
previous periods, net of discounts granted due to COVID-19 and net of provisions. This amount substantially arose from our subsidiary
FCMPB, following a lower court decision that suspended these discounts in our favor but with restrictions on the collection in such invoices
(R$33.1 million and R$6.6 million of discounts granted, net of discounts recovered, for the years ended December 31, 2021 and 2020, respectively).
The outstanding balances are classified as accounts receivable.
Further, COVID-19 has exacerbated certain risks to our
business, including an increased demand for information technology resources, increased risk of phishing and other cybersecurity attacks,
and increased risk of the unauthorized dissemination of personal information, sensitive personal information or proprietary or confidential
information about us or our customers or other third parties. In particular, we process personal data, and we therefore will be subject
to the Brazilian Data Protection Law (Lei Geral de Proteção de Dados), or the LGPD. Considering that our processing
of personal data has increased as a result of the measures we adopted due to the COVID-19 pandemic, if we fail to comply with any provisions
provided for in the LGPD, we could be subject to lawsuits filed by the data subjects, public authorities and private associations, including
those for compensation for damages arising from the violation of the data subjects’ rights, and we could be subject to the penalties
provided for not only in the LGPD, but also in sectorial legislation, such as the Brazilian Consumer Defense and Protection Code (Código
de Defesa do Consumidor) and the Brazilian Civil Framework of the Internet (Marco Civil da Internet). If we do not comply with
the LGPD and are in turn subject to sanctions, we may suffer financial and reputational losses, which may adversely affect our financial
results. See “—Failure to prevent or detect a malicious cyber-attack on our systems and databases could result in a misappropriation
of confidential information or access to highly sensitive information,” “—Our success depends on our ability to monitor
and adapt to technological changes in the education sector and maintain a technological infrastructure that works adequately and without
interruption,” and “—Failure to comply with data privacy regulations could result in reputational damage to our brands
and adversely affect our business, financial condition and results of operations.”
We may be held liable for extraordinary events that may
occur at our campuses, which may have an adverse effect on our image and, consequently, our results of operations.
We may be held liable for the actions of officers, directors,
professors or other employees at our campuses, including allegations of non-compliance by officers, directors, professors or other employees
with specific legislation and regulations implemented by MEC relating to our programs. In the event of accidents, injuries or other damages
affecting students, professors, other employees or third parties at our campuses, we may face claims alleging that we were negligent,
provided inadequate supervision or were otherwise liable for the injury. We may also be subject to claims alleging that officers, directors,
professors or other employees committed moral or sexual harassment or other unlawful acts. Our insurance coverage may not cover certain
indemnifications we may be required to pay, be insufficient to cover these types of claims, or may not cover certain acts or events. We
may also not be able to renew our current insurance policies under the same terms. Such liability claims may affect our reputation and
harm our financial results. See “Item 4. Information on the Company—Business Overview—Insurance.” In addition,
we may also be subject to legal proceedings by current and/or former students alleging breaches of rights granted by the Brazilian Consumer
Protection Code (Código de Defesa do Consumidor), and to legal proceedings by current and/or former employees alleging breaches
of applicable labor laws. Even if unsuccessful, these claims may cause negative publicity, reduce enrollment numbers, increase student
attrition rates, entail substantial expenses and divert the time and attention of our management, materially adversely affecting our results
of operations and financial condition.
We may face restrictions and penalties under the Brazilian
Consumer Protection Code in the future.
Brazil has a series of strict consumer protection laws,
referred to collectively as the Consumer Protection Code (Código de Defesa do Consumidor). These laws apply to all companies
in Brazil that supply products or services to Brazilian consumers. They include protection against misleading and deceptive advertising,
protection against coercive or unfair business practices and protection in the formation and interpretation of contracts, usually in the
form of civil liabilities and administrative penalties for violations.
These penalties are often levied by the Brazilian Consumer
Protection Agencies (Fundação de Proteção e Defesa do Consumidor, or PROCONs), which oversee consumer
issues on a district-by-district basis. Companies that operate across Brazil may face penalties from multiple PROCONs, as well as from
the National Secretariat for Consumers (Secretaria Nacional do Consumidor, or SENACON). Companies
may settle claims made by consumers via PROCONs by paying compensation for violations directly to consumers and through a mechanism that
allows them to adjust their conduct, called a conduct adjustment agreement (Termo de Ajustamento de Conduta, or TAC).
Brazilian public prosecutors may also commence investigations
of alleged violations of consumer rights and require companies to enter into TACs. Companies that violate TACs face potential enforcement
proceedings and other potential penalties such as fines, as set forth in the relevant TAC. Brazilian public prosecutors may also file
public civil actions against companies who violate consumer rights or competition rules, seeking strict adherence to the consumer protection
laws and compensation for any damages to consumers. In certain cases, we may also face investigations and/or sanctions by the CADE, in
the event our business practices are found to affect the competitiveness of the markets in which we operate or the consumers in such markets.
Any change or review of the tax treatment of our activities,
or the loss or reduction in tax benefits on the sale of books (including digital content) may materially adversely affect us.
The Brazilian Federal Constitution, in Article 150, exempts
production, sale and resale activities involving books. In this sense, Medcel is not taxed by the federal VAT (tax on industrial activity,
or “IPI”), the state VAT (tax on sale or resale of products, or “ICMS”) and the municipal VAT (tax on services,
or “ISS”). According to Brazilian federal law No. 10,865/2004, the Company is also benefited from a zero tax rate on Federal
Social Contributions, PIS and COFINS, which are calculated on gross revenue. If the Brazilian government or tax authority or the Brazilian
superior courts decide to change or review the tax treatment for the production or sales of books (including digital books and e-readers),
and we are unable to pass any cost increase onto our students, our results may be materially adversely affected.
Moreover, in October 2021, more than 130 countries agreed
to implement a minimum tax regime for multinational groups, known as Pillar Two, to reform the international corporate taxation. Pillar
Two aims to ensure that multinational groups in scope are liable to a minimum effective corporate tax rate of 15% per country. In December
2021, the OECD released the Pillar Two model rules—accompanied by a comment and guidelines—which are due to be passed into
national legislation but adapted by local conditions. The management closely monitors the progress of the legislative process in each
country in which the Group operates. As of December 31, 2022, we did not have sufficient information to determine any potential quantitative
impact.
If we are unable to maintain consistent educational quality
throughout our network, including the educational materials of our post-secondary education institutions, or keep or adequately train
our faculty members, we may be adversely affected.
Our teaching faculty, including teachers and professors
at our post-secondary education institutions, is essential for maintaining the quality of our programs and the strength of our brand and
reputation. We promote training in order for our faculty to attain and maintain the qualifications we require and for us to provide updating
programs on trends and changes in their areas. Due to shortages in the supply of qualified professors, competition for hiring and retaining
qualified professionals has increased substantially. We cannot assure you that we will succeed in retaining our current professors or
recruiting or training new professors who meet our quality standards, particularly as we continue to expand our operations.
The quality of our academic curricula and the infrastructure
of our campuses are also key elements of the quality of the education we provide. We cannot assure you that we will succeed in identifying
facilities with adequate infrastructure for our new campuses, develop adequate infrastructure in properties we acquire or have enough
resources to continue expanding through acquisitions or development of new projects. In addition, we cannot assure you that we will be
able to develop academic curricula for our new programs with the same levels of excellence as existing programs and meeting the standards
set forth by MEC. Shortages of qualified professors, adequate infrastructure or quality academic curricula for new programs according
to our business model and the parameters set forth by MEC, may have a material adverse effect on our business.
Our business depends on the continued success of the
brands of each of our institutions, as well as the “Afya” brand, and if we fail to maintain and enhance the recognition of
our brands, we may face difficulty enrolling new students, and our reputation and operating results may be harmed.
We believe that market awareness of our brands has contributed
significantly to the success of our business. Maintaining and enhancing our brands is critical to our efforts to grow student enrollments.
Failure to maintain and enhance our brand recognition could have a material and adverse effect on our business, operating results and
financial condition. We have devoted significant resources to our brand promotion efforts in recent years, but we cannot assure you that
these efforts will be successful. If we are unable to further enhance our brand recognition, or if we incur excessive marketing and promotion
expenses, or if our brand image is negatively impacted by any negative publicity, our business and results of operations may be materially
and adversely affected.
If we are not able to maintain our current MEC evaluation
ratings and the evaluation ratings of our students, we may be adversely affected.
We and our students are regularly evaluated and rated
by MEC. If our campuses, programs or students receive lower scores from MEC than in previous years in any of its evaluations, including
the IGC (Índice Geral de Cursos), and the Student Performance National Exam (Exame Nacional de Desempenho de Estudantes,
or ENADE), we may experience a reduction in enrollments and be adversely affected by perceptions of decreased educational quality, which
may negatively affect our reputation and, consequently, our results of operations and financial condition.
Finally, in the event that any of our programs receive
unsatisfactory evaluations, the post-secondary education institution offering the programs may be required to enter into an agreement
with MEC setting forth proposed measures and timetables to improve the program and remedy the unsatisfactory evaluation. Non-compliance
with the terms of the agreement may result in additional penalties on the institution. These penalties could include, but are not limited
to, suspending our ability to enroll students in our programs, denial of accreditation or re-accreditation of our institutions or prohibiting
us from holding regular class sessions, all of which can adversely affect our results of operations and financial condition.
We are subject to supervision by MEC and, consequently,
may suffer sanctions as a result of non-compliance with any regulatory requirements.
Brazilian Federal Law No. 10,861/2004, regulated by Decree
No. 9,235/2017, implemented the activities of supervision of post-secondary education entities and courses in the Brazilian federal education
system. The Secretariat for Regulation and Supervision of Post-secondary Education, or SERES, of MEC is responsible for the regular and
special supervision of the corresponding courses and programs.
Regular supervision derives from complaints and allegations
by students, parents and faculty members, as well as by public entities and the press. These complaints and allegations involve specific
cases of entities with courses showing evidence of irregularities or deficiencies. We are subject to those complaints and representations.
Special supervision, on the other hand, may be commenced by MEC itself, based on its post-secondary education regularity and quality standards,
and involves more than one course or entity, grouped according to the criteria chosen for the special supervision. These criteria may
include unsatisfactory results in the ENADE and the Difference Indicator between Expected and Actual Performance (Indicador de Diferença
entre os Desempenhos Observado e Esperado), among other quality indicators, the history of course evaluations by INEP, as well as
compliance with specific legal requirements as, for example, the minimum ratio between faculty members with master’s or doctorate
degrees.
Administrative irregularities can include, among others:
(i) unlicensed or irregular post-secondary courses; (ii) any outsourcing of post-secondary education activities; (iii) the
failure to file a re-accreditation or recognition or renewal request with respect to post-secondary education courses within the time
periods enacted by MEC pursuant to Decree No. 9,235/2017; and (iv) failure to comply with any penalties imposed by the MEC.
If MEC concludes, as part of its supervisory activities,
that an irregularity constitutes an imminent risk or threat to students or the public interest, it may impose the following measures on
the relevant educational institution for a period to be determined by SERES: (i) suspend the admission of new students; (ii) suspend
the offering of undergraduate or postgraduate lato sensu courses; (iii) suspend the institution’s discretionary ability
to, among other things, create new post-secondary courses and establish course curricula, if applicable; (iv) suspend the license
to establish new distance learning programs; (v) override any ongoing regulatory requests filed by the institution and prohibit new regulatory requests; (vi) suspend participation in the
New FIES; (vii) suspend participation in PROUNI; and (viii) suspend or restrict participation in other federal education programs.
The educational institution can contest the MEC’s findings by filing motions with MEC or with Brazilian courts.
Upon completion of the supervisory process and to the
extent MEC concludes that there are administrative irregularities, SERES may apply the penalties provided for by Law No. 9,394/1996, namely
(i) discontinue courses; (ii) directly intervene in the educational institution; (iii) temporarily suspend the institution’s
discretionary ability to, among other things, create new post-secondary courses and establish course curricula, if applicable; (iv) disqualify
the institution as an educational institution; (v) reduce the number of student vacancies; (vi) temporarily suspend new student
enrollments; or (vii) temporarily suspend courses.
The post-secondary education sector is highly regulated,
and our failure to comply with existing or future laws and regulations could significantly impact our business.
We are subject to various federal laws and extensive
government regulations by MEC, Conselho Nacional de Educação (National Education Council, or CNE), INEP, FIES and
the National Post-secondary Education Assessment Commission (Comissão Nacional de Avaliação da Educação
Superior, or CONAES), among others, including, but not limited to Law No. 12,871, of October 22, 2013, which created the “Mais
Médicos” program.
Brazilian education regulations define three types of
post-secondary education institutions: (i) colleges, (ii) university centers and (iii) universities. The three categories
depend on previous accreditation by MEC to operate. Colleges differ from the other categories with respect to the programs offered, as
colleges depend on previous authorization from MEC to implement new programs, while university centers and universities are not subject
to such requirements, except for courses in law, medicine, psychology, nursing and dentistry, which require the prior approval of MEC.
All accredited educational institutions require the prior
approval of MEC to create campuses outside their headquarters. All post-secondary education programs must be recognized by MEC as a requirement,
together with registration of the program, to validate the diplomas issued by them. However, pursuant to article 101 of Ordinance No.
23/2017 of MEC, issued diplomas may be valid even if the program is not formally recognized by MEC, so long as the educational institution
has filed the request with MEC to certify the program, and the request is pending formal review and approval by MEC. As a result, any
failure to comply with legal and regulatory requirements by post-secondary education entities may result in the imposition of sanctions
by MEC, as well as damage to the program’s reputation.
MEC must authorize our campuses located outside our headquarters
before they can start their operations and programs. For further information, see “Item 4. Information on the Company—Business
Overview—Regulatory Overview.” Distance learning programs, as well as on-campus learning, are also subject to strict accreditation
requirements for their implementation and operation. We must comply with all such requirements in order to obtain and renew all authorizations.
We cannot assure you we will be able to comply with these
regulations and maintain the validity of our authorizations, enrollments and accreditations in the future. If we fail to comply with these
regulatory requirements, MEC could place limitations on our operations, including cancellation of programs, reduction in the number of
positions we offer to students, termination of our ability to issue degrees and certificates and revocation of our accreditation, any
of which could adversely affect our financial condition and results of operations.
We cannot assure you that we will obtain accreditation
or re-accreditation of our post-secondary education institutions, or that our courses will receive authorization or reauthorization as
scheduled, or that they will have all of the accreditations, re-accreditations, authorizations and re-authorizations required by MEC.
The absence of such accreditations and authorizations from the MEC or any delays in obtaining them could adversely affect our financial
condition and results of operations.
In addition, we may also be adversely affected by any
changes in the laws and regulations applicable to post-secondary education institutions, particularly by changes related to: (i) any
revocation of accreditation of private educational institutions; (ii) the imposition of controls on monthly tuition payments or restrictions
on the profitability of private educational institutions; (iii) faculty credentials; (iv) academic requirements for courses
and curricula; (v) infrastructure requirements of campuses, such as libraries, laboratories and administrative support; (vi) the “Mais Médicos” program; (vii) the
promulgation by the MEC of new rules and regulations affecting post-secondary education, in particular with respect to distance learning
programs; and (viii) any local restrictions that may be re-imposed to curb the impact of the COVID-19 pandemic in the places we operate.
We may be materially adversely affected if we are unable
to obtain these authorizations, accreditations and course recognitions in a timely manner, if we cannot introduce new courses as quickly
as our competitors, if we are not able to or do not comply with any new rules or regulations promulgated by the MEC or if laws and regulations
are passed adverse to the business and operations of post-secondary education institutions.
Our success depends on our ability to operate in strategically
located property that is easily accessible by public transportation.
We believe that urban mobility, inadequate public transportation
systems and high transportation costs in many Brazilian cities make the location and accessibility of campuses a decisive factor for students
choosing an educational institution. Therefore, a key component of the success of our business consists in finding, renting and/or buying
strategically located property that meets the needs of our students. We cannot guarantee that we will be able to keep our current property
or acquire new property that is strategically located in the future. In addition, acquisition costs, costs associated with improvements,
construction, and repairs of existing properties and rental values for the properties we use might increase in the future and could have
a material adverse effect on our business. Finally, due to demographic and socioeconomic changes in the regions in which we operate, we
cannot guarantee that the location of our campuses will continue to be attractive and convenient to students.
Failure to protect or enforce our intellectual property
and other proprietary rights could adversely affect our business and financial condition and results of operations.
We rely and expect to continue to rely on a combination
of trademark, copyright, patent and trade secret protection laws, as well as confidentiality and license agreements with our employees,
consultants and third parties with whom we have relationships to protect our intellectual property and proprietary rights. As of the date
of this annual report, we had no issued patents and one patent application pending in Brazil. As of December 31, 2022, we were party to
337 agreements, with third-party authors with respect to educational content. As of December 31, 2022, we owned 299 trademark registrations
in Brazil, and we have also sought to register six trademarks abroad, in the United States and in the European Union. As of the date of
this annual report, we have 129 pending trademark applications in Brazil and unregistered trademarks that we use to promote our brand,
and also own 297 registered domain names in Brazil. From time to time, we expect to file additional patent, copyright and trademark applications
in Brazil and abroad. Nevertheless, these applications may not be approved or otherwise provide the full protection we seek. Any dismissal
of our “AFYA” trademark application may impact our business. Third parties may challenge any patents, copyrights, trademarks
and other intellectual property and proprietary rights owned or held by us. Third parties may knowingly or unknowingly infringe, misappropriate
or otherwise violate our patents, copyrights, trademarks and other proprietary rights, and we may not be able to prevent infringement,
misappropriation or other violation without substantial expense to us.
Furthermore, we cannot guarantee that:
| · | our intellectual property and proprietary rights will provide competitive advantages to us; |
| · | our competitors or others will not design around our intellectual property or proprietary rights; |
| · | our ability to assert or enforce our intellectual property or proprietary rights against potential competitors or to settle current
or future disputes will not be limited by our agreements with third parties; |
| · | our intellectual property and proprietary rights will be enforced in jurisdictions where competition may be intense or where legal
protection may be weak; |
| · | any of the patents, trademarks, copyrights, trade secrets or other intellectual property or proprietary rights that we presently employ
in our business will not lapse or be invalidated, circumvented, challenged or abandoned; or |
| · | we will not lose the ability to assert or enforce our intellectual property or proprietary rights against or to license our intellectual
property or proprietary rights to others and collect royalties or other payments. |
If we pursue litigation to assert or enforce our intellectual
property or proprietary rights, an adverse decision in any of these legal actions could limit our ability to assert our intellectual property
or proprietary rights, limit the value of our intellectual property or proprietary rights or otherwise negatively impact our business,
financial condition and results of operations. If the protection of our intellectual property and proprietary rights is inadequate to
prevent use or misappropriation by third parties, the value of our brand and other intangible assets may be diminished, competitors may
be able to more effectively mimic our service and methods of operations, the perception of our business and service to customers and potential
customers may become confused in the marketplace and our ability to attract customers may be adversely affected.
We may in the future be subject to intellectual property
claims, which are costly to defend and, if we do not succeed in defending such claims, could harm our business, financial condition and
operating results.
From time to time, third parties may allege in the future
that we or our business infringes, misappropriates or otherwise violates their intellectual property or proprietary rights, including
with respect to our publications. Many companies, including various “non-practicing entities” or “patent trolls,”
are devoting significant resources to developing or acquiring patents that could potentially affect many aspects of our business. We have
not exhaustively searched patents related to our technology. In addition, the publishing industry has been, and we expect in the future
will continue to be, the target of counterfeiting and piracy. We may implement measures in an effort to protect against these potential
liabilities that could require us to spend substantial resources. Any costs incurred as a result of liability or asserted liability relating
to sales of unauthorized or counterfeit educational materials could harm our business, reputation and financial condition.
Third parties may initiate litigation against us without
warning. Others may send us letters or other communications that make allegations without initiating litigation. We have in the past and
may in the future receive such communications, which we assess on a case-by-case basis. We may elect not to respond to the communication
if we believe it is without merit or we may attempt to resolve disputes out of court by electing to pay royalties or other fees for licenses.
If we are forced to defend ourselves against intellectual property claims, whether they are with or without merit or are determined in
our favor, we may face costly litigation, diversion of technical and management personnel, inability to use our current website or inability
to market our service or merchandise our products. As a result of a dispute, we may have to develop non-infringing technology, including
partially or fully revising any publication that infringes intellectual property rights, enter into licensing agreements, adjust our merchandising
or marketing activities or take other action to resolve the claims. These actions, if required, may be unavailable on terms acceptable
to us or may be costly or unavailable. If we are unable to obtain sufficient rights or develop non-infringing intellectual property or
otherwise alter our business practices, as appropriate, on a timely basis, our reputation or brand, our business and our competitive position
may be affected adversely and we may be subject to an injunction or be required to pay or incur substantial damages and/or fees and/or
royalties.
Most of our services are provided using proprietary software
and our software is mainly developed by our employees, who assign to us their copyrights over the software. In this regard, though applicable
law establishes that employers shall have full title over rights relating to software developed by their employees, we could be subject
to lawsuits by former employees claiming ownership of such software. As a result, we may be required to obtain licenses of such software,
incurring costs relating to payments of royalties and/or damages and we may be forced to cease the use of such software. If we are unable
to use certain of our proprietary software as a result of any of the foregoing or otherwise, this could have a material adverse effect
on our business, financial condition and results of operations.
In addition, we use open source software in connection
with certain of our products and services. Companies that incorporate open source software into their products have, from time to time,
faced claims challenging the ownership of open source software and/or compliance with open source license terms. As a result, we could
be subject to suits by parties claiming ownership of what we believe to be open source software or non-compliance with open source licensing
terms. Some open source software licenses require users who distribute or use open source software as part of their software to publicly
disclose all or part of the source code to such software and/or make available any derivative works of the open source code on unfavorable
terms or at no cost. Any requirement to disclose our proprietary source code or pay damages for breach of contract could have a material
adverse effect on our business, financial condition and results of operations.
Unfavorable decisions in our legal, arbitration or administrative
proceedings may adversely affect us.
We are, and we, our controlling shareholders, directors
or officers may be in the future, party to legal, arbitration and administrative investigations, inspections and proceedings arising from
the ordinary course of our business or from nonrecurring corporate, tax, criminal or regulatory events, involving our suppliers, students,
faculty members, as well as environmental, competition and tax authorities, especially with respect to civil, tax, criminal and labor
claims. We cannot guarantee that the results of these proceedings will be favorable to us or that we have made sufficient provisions for
liabilities that may arise as a result of these or other proceedings. Adverse decisions on material legal, arbitration or administrative
proceedings may damage our reputation and may adversely affect our results of operations and the price of our Class A common shares.
In addition, Mr. Nicolau Carvalho Esteves, our co-chairman,
is currently party to a public civil proceeding filed by the federal prosecutor’s office against Mr. Carvalho Esteves and other
individuals in connection with certain irregular administrative acts alleged to have taken place during each of their respective terms
as Health Secretary of the State of Tocantins (Secretário de Saúde do Estado de Tocantins) between 2012 and 2014,
a position held by Mr. Carvalho Esteves for a period of four months, from March 9, 2012 to July 20, 2012. In February 2022, a decision
was issued, dismissing the motions submitted by the public prosecutor’s office, and, to date no appeal has been filed by the public
prosecutor’s office. The risk of loss in these proceedings is classified as remote by external counsel. If Mr. Carvalho Esteves
is found liable, he may be subject to penalties, including a three-year prohibition on him or any legal entity under his control transacting
with public entities or being granted tax incentives/benefits. We cannot guarantee that the results of these proceedings will be favorable
to Mr. Carvalho Esteves and any adverse decision may damage our reputation, which may have an adverse effect on our business, results
of operations and the price of our Class A common shares. For further information, see “Item 6. Directors, Senior Management and
Employees—A. Directors and Senior Management—Legal Proceedings.”
We are currently in the process of obtaining or renewing
local licenses and permits, including licenses from the fire department, for some of the real estate we use. Failure to obtain renewals
of these licenses and permits in a timely manner may result in penalties, including closures of some of our campuses.
The use of all of our buildings, including our operational
and administrative buildings, is subject to the successful issuance of an occupancy permit (Habite-se), or equivalent certificate,
issued by the municipality where the property is located, certifying that the building was constructed in compliance with applicable zoning
and municipal regulations. In addition, non-residential properties are required to have a use and operations license and/or permit, issued
by the competent municipality, and a fire department inspection certificate, issued by the fire department, prior to being used regularly.
We are currently in the process of obtaining and/or renewing
these licenses for some of the real estate we use. The absence of such licenses may result in penalties ranging from fines to forced demolition
of the areas that were not built in compliance with applicable codes or, in the worst-case scenario, the temporary or permanent closure
of the campus or branch lacking the licenses and permits to the extent the relevant penalties and fines have not been paid and the licenses
and permits have not been obtained following notifications from the relevant authorities. Any penalties imposed, and in particular, the
forced closure of any of our campuses or branches, may result in a material adverse effect on our business. Moreover, in the event of
any accident at our campuses or branches, the lack of such licenses may result in civil and criminal liability, as well as cause the cancellation
of insurance policies, if any, for the respective campus or branch and may damage our reputation.
We may not be able to maintain or renew our existing
leases.
We lease substantially all of the properties on our campuses.
According to Brazilian lease laws, a lessee has the right to renew existing leases for subsequent terms equal to the original term of
the lease. In order for a lessee to enforce this right, the following criteria must be met (i) the non-residential lease agreement
must have a fixed term equal to or greater than five consecutive years, or, in the event there is more than one agreement or amendment
thereto regarding the same real estate, the aggregate term in such agreement or amendment must be greater than five consecutive years
(ii) the lessee must have been using the property for the same purpose for a minimum and continuous period of three years and (iii) the
lessee must claim the right of automatic renewal at the most one year and at least six months prior to the end of the term of the lease
agreement.
Lease agreements with terms lasting less than five years
are not entitled to a right of compulsory renewal and, as a result, the lessor has the right to refuse renewal of the lease upon expiration
of its term. The lease agreements relating to our campuses generally have terms lasting from five to 30 years and are renewable in accordance
with applicable Brazilian lease laws. If we are forced to close any of our campuses due to the termination of a lease agreement and our
inability to renew the lease, our business and results of operations may be adversely affected.
In addition, most of our lease agreements are not registered
with the relevant real estate registries. We therefore do not have a right of first refusal over the applicable property in the event
of a sale by its landlord and the subsequent purchaser may require that we vacate the property.
Acquisitions of educational institutions, in certain
circumstances, must be approved by the Administrative Council for Economic Defense.
Brazilian legislation provides that acquisitions of educational
institutions meeting certain requirements must be approved by Brazil’s Administrative Council for Economic Defense (Conselho
Administrativo de Defesa Econômica, or CADE) prior to the completion of the acquisition if one of the companies or group of
companies involved has gross annual revenues in Brazil of at least R$750.0 million in the year immediately prior to the acquisition and
any other party or group of companies involved has gross income of at least R$75.0 million in that same period. As part of this process,
CADE must determine whether the specific operation affects the competitiveness of the market in question or the consumers in such markets.
CADE may not approve our future acquisitions or may condition approval of our acquisitions on our disposal of some of the operations of
the target of the acquisition, or impose restrictions on the operations and commercialization of the target. Failure to obtain approval
for future acquisitions or any conditional approvals of future acquisitions may result in expenses that may adversely affect our results
of operations and financial condition. As a result of our growth strategy through acquisitions of new entities, we may need additional
funds to implement our strategy. Therefore, if we cannot obtain adequate financing to conclude any potential acquisition and implement
our expansion plans, our growth strategy will be affected.
Some of the properties that we occupy are owned by companies
controlled by one of our controlling shareholders. Therefore, we are exposed to conflicts of interest, since the administration of such
properties may conflict with our interests, those of such controlling shareholder and those of our other shareholders.
Some of the properties we occupy, including properties
where some of our campuses are located, are owned and operated by companies controlled by one of our controlling shareholders. Therefore,
the interests of our controlling shareholder in the administration of such property may conflict with our interests and those of our other
shareholders. For further information, see “Item 7. Major Shareholders and Related Party Transactions—Related Party Transactions”
and note 8 to our audited consolidated financial statements.
Our holding company structure makes us dependent on the
operations of our subsidiaries. We depend on dividend distributions by our subsidiaries, and we may be adversely affected if the performance
of our subsidiaries is not positive.
We are a Cayman Islands exempted company with limited
liability. Our material assets are our direct and indirect equity interests in our subsidiaries. We control a number of subsidiary companies
that carry out the business activities of our corporate group. Our ability to comply with our financial obligations and to pay dividends
to our shareholders depends on our ability to receive distributions from the companies we control, which in turn depends on the cash flow
and profits of those companies. There is no guarantee that the cash flow and profits of our controlled companies will be sufficient for
us to comply with our financial obligations and pay dividends or interest on shareholders’ equity to our shareholders. Furthermore,
exchange rate fluctuation will affect the U.S. dollar value of any distributions our subsidiaries make with respect to our equity interests
in those subsidiaries.
In addition, the Brazilian federal government recently
stated that the income tax exemption on the distribution of dividends may be repealed and income tax assessed on the distribution of dividends
in the future, and that applicable taxes on the payment of interest on shareholders’ equity may be increased in the future. Any
repeal of the income tax exemption on the distribution of dividends and any increase in applicable taxes on the payment of interest on
shareholders’ equity may adversely affect us.
We and our subsidiaries may be held directly or indirectly
responsible for labor claims pursuant to contracted services.
To meet the needs of our students and offer greater comfort
and quality in all areas and aspects of our activities, we depend on service providers and suppliers for services such as cleaning, surveillance,
telemarketing and security. We may be adversely affected if these third-party service providers and suppliers do not meet their obligations
under Brazilian labor laws. In particular, according to Brazilian law we may be liable to the employees of these service providers and
suppliers for labor obligations of these service providers and suppliers to the extent such service providers and suppliers fail to indemnify
such employees pursuant to court orders, and we may also be fined by the relevant authorities. If we are held liable for such claims,
we may be adversely affected.
We could be adversely affected if we are unable to pass
on increases in our costs and expenses to our students by adjusting our monthly tuition fees.
Our primary source of income is the monthly tuition payments
we charge to our students. Our payroll costs and expenses account for the majority of the costs of services and general and administrative
expenses, or 53.1%, 53.1% and 53.3% of such costs and expenses for the years ended December 31, 2022, 2021 and 2020, respectively. Our
faculty and administrative employees are represented by labor unions in the higher education sector and are covered by collective bargaining
agreements or similar arrangements determining the number of working hours, minimum compensation, vacations and fringe benefits, among
other terms. These agreements are subject to annual renegotiation and may be so modified. We could also be adversely affected if we fail
to achieve and maintain cooperative relationships with our professors’ or administrative employees’ unions or face strikes,
stoppages or other labor disruptions by our professors or employees, or if we are unable to pass on any increase in costs arising from
the renegotiation of collective bargaining agreements to the monthly tuition fees paid by students, which may have a material adverse
effect on our business.
In addition, our utilities expenses (comprised mainly
of water, electricity and telephone expenses) represented 1.1%, 0.8% and 0.7%, respectively, of our costs of services and general and
administrative expenses. Personnel costs and expenses, lease values and the cost of electricity are adjusted regularly using indices that
reflect changes in inflation levels. If we are not able to transfer any increases in our costs and expenses to students by increasing
the amounts of their monthly tuition fees, for example as a result of ongoing political and economic instability in Brazil or globally,
our operating results may be adversely affected.
If we are not able to attract and retain students, or
are unable to do so without decreasing our tuition fees, our revenues may decline.
The success of our business depends primarily on the
number of students enrolled in our programs and the tuition fees that they pay. Our ability to attract and retain students depends mainly
on the tuition fees we charge, the convenient locations of our facilities, the infrastructure of our campuses and the quality of our programs
as perceived by our existing and potential students. These factors are affected by, among other things, our ability to (i) respond
to increasing competitive pressures, (ii) develop our educational systems to address changing market trends and demands from post-secondary
education institutions and students, (iii) develop new programs and enhance existing programs to respond to changes in market trends
and student demands, (iv) adequately prepare our students for careers in their chosen professional occupations, (v) successfully
implement our expansion strategy, (vi) manage our growth while maintaining our teaching quality and (vii) effectively market
and sell our programs to a broader base of prospective students. If we are unable to continue to attract new students to enroll in our
programs and to retain our current students without significantly decreasing tuition, for example as a result of changes in our students’
preferences due to economic uncertainty or volatility, our revenues and our business may decline and we may be adversely affected.
Our Digital Services segment is subject to seasonal fluctuations,
which may cause our operating results to fluctuate from quarter-to-quarter and adversely impact our working capital and liquidity throughout
the year, adversely affecting our business, financial condition and results of operations.
Afya has three reporting segments: (1) Undergrad, which
provides educational services through undergraduate courses related to medicine, other health sciences and other undergraduate programs;
(2) Continuing Education, which provides specialization programs and graduate courses for physicians; and (3) Digital Services, which
provides digital solutions for all stages of a medical career. This business unit is divided into Business to Physician (which encompasses Content & Technology for Medical Education, Clinical
Decision Software, Practice Management Tools & Electronic Medical Records, Physician-Patient Relationship, Telemedicine, and Digital
Prescription), and Business to Business (which provides access and demand for the healthcare players).
Undergrad segment revenues are related to the intake
process and monthly tuition fees charged to students over the period; accordingly, this segment generally is not subject to significant
fluctuations from quarter to quarter. Continuing Education segment revenues are related to monthly intakes and tuition fees and generally
is not subject to significant fluctuations from quarter to quarter. Digital Services is comprised mainly of Medcel, Pebmed, and iClinic
revenues. While Pebmed and iClinic generally do not experience significant fluctuations resulting from seasonality, Medcel’s revenue
is concentrated in the first and last quarter of the fiscal year due to the period of enrollments of Medcel’s clients. In addition,
the majority of Medcel’s revenues are derived from printed books and e-books, which are recognized at the point in time when control
is transferred to the customer. Consequently, the Digital Services segment generally has higher revenues and results of operations in
the first and last quarters of the fiscal year than in the second and third quarters of the fiscal year.
In addition, the deterioration of Brazilian macroeconomic
conditions as a result of, among other factors, the COVID-19 pandemic, resulted in the reduction of the disposable income of current and
prospective customers of our Continuing Education, leading to the postponement of their residency and post-graduate specialization plans,
consequently reducing the demand for our residency preparatory courses and medical post-graduate specialization programs. Uncertain economic
conditions have also affected the decision to purchase products that are not of primary need for the doctor, especially for post-graduate
specialization programs. Regarding the preparatory courses, it is worth adding that there was a drop in demand in the courses with short
duration due to the uncertainty on whether there would be exams or any related delays.
Accordingly, we expect quarterly fluctuations in our
revenues and operating results to continue. These fluctuations could result in volatility and adversely affect our liquidity and cash
flows. As our business grows, these seasonal fluctuations may become more pronounced. As a result, we believe that sequential quarterly
comparisons of our financial results may not provide an accurate assessment of our financial position.
We face risks relating to our Digital Services segment.
We may face risks relating to the expansion, including
through acquisitions, of our Digital Services segment, which provides content and technology for medical education, clinical decisions
software, practice management tools and electronic medical records, doctor-patient relationship, telemedicine and digital prescriptions.
Companies operating in this segment are subject to significant execution risk since they are providing new digital features and developing
a new market, where the technological needs, the expectations of our customers and market standards change rapidly. As such, we may have
to quickly modify our products and services to adapt to new digital education technologies, practices and standards.
In addition, the success of our digital education programs
depends on the general population having easy and affordable access to the internet, as well as on other technological factors that are
outside of our control. If the internet becomes inaccessible or access costs increase to levels higher than current prices, or if the
number of students interested in digital education educational methods does not increase, we may be unable to successfully implement our
digital education program strategy, which would have an adverse effect on our growth strategy.
In addition, we also face operational risks relating
to the integration of any such companies to build our ecosystem, including userbase and platform integration risks, among other risks.
As a result, any acquisitions we may make in this segment involve a number of uncertainties, risks and challenges that may have a material
adverse effect on our business and results of operations, and result in the risk of impairment. See also “—We may not be able
to identify and acquire new medical higher education institutions or meet our strategic and financial goals in connection with any business
acquisition we seek, and difficulties in effectively integrating and managing a growing number of acquisitions may adversely affect our
strategic objectives.”
We are subject to environmental laws and regulations,
which may become more stringent in the future and increase our obligations and capital expenditures with respect to their compliance.
We are subject to several environmental municipal, state
and federal laws. Compliance with these laws and regulations is monitored by governmental agencies and bodies that may impose administrative,
civil and criminal sanctions on us. Violations of these laws and regulations may result in
the imposition of criminal and administrative sanctions, as well as civil liability, seeking redress for alleged environmental damages
and damages to third parties. Causing environmental damage may lead to administrative sanctions, which may include, among other consequences,
penalties such as fines (ranging from R$50 to R$50 million), revocation of our licenses and authorizations, and the temporary or permanent
suspension of our activities. There is no limit to the amount that the courts may award to cover the costs of remediation in the case
of civil liability or, if the environmental damage cannot be repaired, the payment of an indemnity. In addition, a claim seeking compensation
for environmental damages is not subject to a statute of limitations. The enactment of more stringent laws and regulations or more stringent
interpretations of existing laws and regulations may force us to increase our capital expenditures relating to environmental compliance,
therefore diverting funds from previously planned investments. These changes could have a material adverse effect on us. Governmental
agencies or other authorities may also significantly delay or deny the issuance of permits and authorizations required for our operations,
preventing us from making constructions and improvements in our campuses. In addition, the improper disposal of solid waste, as well as
accidents resulting from the transportation of such wastes, may give rise to administrative, civil and criminal sanctions. Considering
the provision on strict and joint environmental civil liability, the hiring of third parties to provide services for the collection, transportation
and final disposal of waste does not exempt us from liability for any environmental damage caused by such third parties.
We may be adversely affected if the government changes
its investment strategy in education.
According to Brazilian Federal Law No. 9,394/1996, as
amended, providing education is a duty of the government and of the family, and private education is permitted, in accordance with the
terms set forth by the Brazilian constitution and applicable laws and regulations. Certain public institutions may have certain competitive
advantages over us in the admissions process, as they do not charge tuition fees and may be perceived to be more prestigious than private
institutions, but the limited number of positions available and the competitive nature of the admission process to public institutions
significantly restricts access to these institutions by students. However, the Brazilian government may change its policy and increase
the competition we face by (i) increasing the level of public investment in basic education and post-secondary education in general,
opening a higher amount of positions and increasing the quality of education offered by public entities; and (ii) shifting resources
from institutions that are centers of excellence and research to public post-secondary education institutions. The introduction and extension
of affirmative action admission policies by federal and state institutions based on income, race or ethnicity criteria could also heighten
the level of competition in the industry. Any policy change affecting the level of public investment in any aspect of the education sector
may adversely affect us. As of the date of this annual report, our management is not aware of any pending policy changes or proposed legislation
affecting the level of public investment in the education sector in Brazil.
Government agencies, MEC and third parties may conduct
inspections, file administrative proceedings or initiate litigation against us.
Because we operate in a highly regulated industry, government
agencies, MEC or third parties may conduct inspections, file administrative proceedings or initiate litigation for non-compliance with
regulations against us or the institutions we purchase. If the results of these proceedings or litigations are unfavorable to us, or if
we are unable to successfully defend our cases, we may be required to pay monetary damages or be subject to fines, limitations, injunctions
or other penalties. Even if we adequately address issues raised by an inspection conducted by an agency or successfully defend our case
in an administrative proceeding or court action, we may have to set aside significant financial and management resources to settle issues
raised by these proceedings or to those lawsuits or claims. Administrative proceedings or court actions brought against us may damage
our reputation, even if such lawsuits or claims are without merit.
Our success depends on our ability to monitor and adapt
to technological changes in the education sector and maintain a technological infrastructure that works adequately and without interruption.
Information technology is an essential factor for our
growth. Our information technology systems and tools may become obsolete or insufficient, or we may have difficulties in following and
adapting to technological changes in the education sector, particularly in the distance learning segment where the technological needs
and expectations of our customers and market standards change rapidly and we must quickly adapt to new distance learning technology, practices
and standards. Moreover, our competitors may introduce better products or service platforms. Our success depends on our ability to efficiently
improve our current products while developing and introducing new products that are accepted in the marketplace. Additionally, a failure to upgrade
our technology, features, content, security infrastructure, network infrastructure, or other infrastructure associated with our platform
could harm our business. Adverse consequences could include unanticipated disruptions, slower response times, bugs, degradation in levels
of customer support, impaired quality of users’ experiences of our educational platform and delays in reporting accurate financial
information.
Our business, particularly our distance learning segment,
depends on our information technology infrastructure functioning properly and without interruptions. Several problems regarding our information
technology structure, such as viruses, hackers, system interruptions and technical difficulties regarding our satellite transmissions
of data, sound and image, may have a material adverse effect on us and our business.
In addition, we face risks associated with unauthorized
access to our systems, including by hackers and due to failures of our electronic security measures. These unauthorized entries into our
systems can result in the theft of proprietary or sensitive information, including student information, or cause interruptions in the
operation of our systems. As a result, we may be forced to incur considerable expenses to protect our systems from electronic security
breaches and to mitigate our exposure to technological problems and interruptions.
The Internet Act (Law No. 12,965/2014) applies only to
personal data collected through the internet, and establishes other principles and rules with respect to the privacy and protection of
the personal and behavioral data of internet users. The Internet Act guarantees, among others, the privacy of internet and privately stored
communications. Any data processing activity is subject to the data subject’s informed, free and express consent. Decree No. 8,771/2016,
which regulates the Internet Act, requires internet app providers to maintain certain security measures in connection with the storage
of personal data, including: (i) strict controls on access to personal data; (ii) authentication safeguards; (iii) detailed
data inventories (e.g., date, time and duration of access to the data, identity of the employee that accessed the data and the actions
taken), and (iv) use of IT solutions to ensure the data is protected (for example, data encryption or other equivalent protective
measures). If we fail to comply with the provisions of the Internet Act, we may be subject to sanctions and penalties, including damages,
which will be assessed based on the nature and degree of our non-compliance, among other factors.
Failure to prevent or detect a malicious cyber-attack
on our systems and databases could result in a misappropriation of confidential information or access to highly sensitive information.
Cyber-attacks are becoming more sophisticated and pervasive.
Across our business, we hold large volumes of personally identifiable information, including that of employees, institutions, customers,
students and parents, legal guardians, patients, physicians and clients (B2B and B2C). Individuals have tried and may continue to try
to gain unauthorized access to our data in order to misappropriate such information for potentially fraudulent purposes, and our security
measures may fail to prevent such unauthorized access. A breach of our systems could result in a devastating impact on our reputation,
financial condition or student experience. In addition, if we were unable to prove that our systems are properly designed to detect an
intrusion, we could be subject to severe penalties and loss of existing or future business.
In particular, data protection and privacy laws are developing
rapidly to take into account the changes in cultural and consumer attitudes towards the protection of personal data. In operating our
business and selling our products and services to customers, we and our subsidiaries collect, use, store, transmit and otherwise process
employee and customer data, including sensitive personal data. As a result, we and our subsidiaries are subject to a variety of laws and
regulations in Brazil, as well as contractual obligations, regarding data privacy, security and protection. In many cases, these laws
and regulations apply not only to third-party transactions, but also to transfers of information between or among us, our subsidiaries
and other parties with which we have commercial relationships.
Privacy, information security, and data protection are
significant issues globally. The regulatory framework governing the collection, processing, storage, use and sharing of certain information,
particularly financial and other personal data, is rapidly evolving and is likely to continue to be subject to uncertainty and varying
interpretations. The occurrence of unanticipated events and the development of evolving technologies often rapidly drive the adoption
of legislation or regulation affecting the use, collection or other processing of data and the manner in which we conduct our business.
Any failure or perceived failure by us to comply with our privacy policies or any applicable privacy, security or data protection, information
security or consumer protection-related laws, regulations, orders or industry standards in one or more jurisdictions could expose us to
costly litigation, significant awards, fines or judgments, civil and criminal penalties or negative publicity,
and could materially and adversely affect our business, financial condition and results of operations.
We rely upon a third-party data center service provider
to host certain aspects of our platform and content and any disruption to, or interference with, our use of such services could impair
our ability to deliver our platform, resulting in customer dissatisfaction, damaging our reputation, and harming our business.
We utilize data center hosting facilities from a global
third-party service provider to make certain content available on our platform. Our operations depend, in part, on our provider’s
ability to protect its facilities against damage or interruption from natural disasters, power or telecommunications failures, criminal
acts and similar events. The occurrence of spikes in user volume, traffic, natural disasters, acts of terrorism, vandalism or sabotage,
or a decision to close a facility without adequate notice, or other unanticipated problems at our provider’s facilities could result
in lengthy interruptions in the availability of our platform, which would adversely affect our business.
Failure to comply with data privacy regulations could
result in reputational damage to our brands and adversely affect our business, financial condition and results of operations.
Any perceived or actual unauthorized disclosure of personally
identifiable information, whether through breach of our network by an unauthorized party, employee theft, misuse or error or otherwise,
could harm our reputation, impair our ability to attract and retain our customers, or subject us to claims or litigation arising from
damages suffered by individuals. Failure to adequately protect personally identifiable information could potentially lead to penalties,
significant remediation costs, reputational damage, the cancellation of existing contracts and difficulty in competing for future business.
In addition, we could incur significant costs in complying with relevant laws and regulations regarding the unauthorized disclosure of
personal information, which may be affected by any changes to data privacy legislation at both the federal and state levels.
In particular, on August 14, 2018, the President of Brazil
approved the LGPD, which came completely into force on August 1, 2021. The LGPD is a comprehensive data protection law establishing general
principles and obligations that apply across multiple economic sectors and contractual relationships. The LGPD applies to individuals
or legal, private or government entities, who process personal data in Brazil or collect personal data in Brazil or, further, when the
processing activities have the purpose of offering or supplying goods or services to data subjects located in Brazil. The LGPD establishes
detailed rules for the collection, use, processing, storage and any operation carried out with personal data (including personal data
of clients, suppliers and employees), and affects all economic sectors, including the relationship between customers and suppliers of
goods and services, employees and employers and other relationships in which personal data is collected, whether in a digital or physical
environment.
Specifically, the LGPD establishes, among other things,
data subjects’ rights, the legal basis for personal data protection, requirements for obtaining consent from data owners, obligations
and requirements related to security incidents, data leaks and international data transfers, as well as the creation of the National Data
Protection Authority (Autoridade Nacional de Proteção de Dados, “ANPD”), for the purposes of monitoring,
implementing and supervising compliance with the LGPD in Brazil. In the event of non-compliance with the LGPD, we may be subject to penalties,
including (1) warnings, with the impositions of a deadline for the adoption of corrective measures; (2) a one-time fine of up
to 2% (subject to an upper limit of R$50,000,000) of our revenue; (3) a daily fine (subject to an upper limit of R$50,000,000); (4) public
disclosure of the violation; (5) the restriction of access to the personal data to which the violation relates, until corrective
measures are implemented; (6) deletion of the personal data to which the violation relates; (7) partial suspension of the databases
to which the violation relates for up to six months, which can be extended for an equal period until corrective measures are implemented;
(8) suspension of the personal data processing activities to which the violation relates for up to 12 months; and (9) partial
or full prohibition on personal data processing activities. In addition, the LGPD creates a private cause of action, which means we are
subject to both class-based and individual claims for violations of the LGPD. The application of sanctions by the ANPD has been further
regulated by the Regulations on the Application of Administrative Sanctions, dated August 27, 2023, as a result of which the ANPD will
now be able to apply administrative sanctions based on clearer and more established guidelines and requirements.
While we are in the process of putting in place systems
and processes to comply with the LGPD, we cannot assure you that our LGPD compliance efforts will be deemed appropriate or sufficient
by regulatory authorities, in particular ANPD, or by courts, such as the Brazilian Public Prosecution Office (Ministério Público).
Moreover, as the LGPD requires further regulation from the ANPD regarding several aspects of the law, which are yet unknown, we may have difficulty adapting our systems and processes to the new legislation
due to the legislation’s complexity. The changes have impacted, and could further adversely impact, our business by increasing our
operational and compliance costs.
Any additional privacy laws, rules or regulations enacted
or approved in Brazil or in other jurisdictions in which we operate could cause us to incur costs to correct the breaches or failures,
expose us to uninsured liability, increase our risk of regulatory scrutiny, subject us to lawsuits and administrative procedures, and
result in the imposition of material penalties and fines under state and federal laws or regulations, which could seriously harm our business,
financial condition or results of operations. Any failure, real or perceived, by us to comply with our privacy policies or with any regulatory
requirements or orders or other local, state, federal or international privacy or consumer protection-related laws and regulations could
cause customers to reduce their purchases of our products and services and could materially and adversely affect our business.
We are subject to anti-corruption, anti-bribery and anti-money
laundering laws and regulations.
We operate in jurisdictions that have a high risk for
corruption and we are subject to various anti-corruption, anti-bribery and anti-money laundering laws and regulations, including the Brazilian
Federal Law No. 12,846/2013, also known as the Clean Company Act (and Decree No. 11,129/2022 that regulates the Clean Company Act), Brazilian
Federal Law No. 9,613/1998, as amended by Brazilian Federal Law No. 12,683/2012, and Brazilian Federal Law No. 8,429/1992, as amended
by Brazilian Federal Law No. 14,230/2022, in addition to the United States Foreign Corrupt Practices Act of 1977, as amended, or the FCPA.
Both the Clean Company Act and the FCPA impose liability against companies who engage in bribery of government officials, either directly
or through intermediaries.
Anti-corruption laws are interpreted broadly and prohibit
us and our collaborators from authorizing, offering, or directly or indirectly providing improper payments or benefits to recipients in
the public or private sector. Although we strongly condemn the practice of corruption and bribery by promoting a culture of ethics and
through our integrity program, we or our collaborators may have direct and indirect interactions with government agencies and state-affiliated
entities and universities in the course of our business. We use third-party collaborators, and strategic partners, law firms, and other
representatives for regulatory compliance, patent registration, deregulation advocacy, field testing, and other purposes. We can be held
liable for the corrupt or other illegal activities of these third-party collaborators, our employees, representatives, contractors, partners,
and agents, even if we do not explicitly authorize such activities.
Anti-money laundering, anti-bribery, anti-corruption
and sanctions laws and regulations to which we are subject require us, among other things, to conduct full customer due diligence (including
sanctions and politically exposed person screening) and to keep our customer, account and transaction information up to date. We have
implemented and are in the process of reviewing our policies and procedures detailing what is required from those responsible, but all
such policies may not be completed or may not be fully in effect as of the date of this annual report (in particular, our policies relating
to sanctions laws and regulations). In addition, we rely heavily on our employees to assist us by spotting such illegal and improper activities
and reporting them, and our employees have varying degrees of experience in recognizing criminal tactics and understanding the level of
sophistication of criminal organizations. In addition, we rely upon our relevant counterparties to a large degree to maintain and appropriately
apply their own appropriate compliance measures, procedures and internal policies. Accordingly, there can be no assurance that all of
our employees, representatives, contractors, partners, or agents will comply with these laws at all times. If we are unable to apply the
necessary scrutiny and oversight of employees, third parties to whom we outsource certain tasks and processes or counterparties, we increase
the risk of regulatory breach.
Violations of – or even accusations of or associations
with violations of – anti-corruption, anti-bribery and anti-money laundering laws and regulations could result in criminal liability,
administrative and civil lawsuits, significant fines and penalties (including being added to “black lists” that would prohibit
certain parties from engaging in transactions with us), forfeiture of significant assets and reputational harm. Non-compliance with these
laws could subject us to whistleblower complaints, investigations, sanctions, settlements, prosecution, injunctions, suspension and debarment
from contracting with certain governments or other persons, the loss of export privileges, reputational harm, adverse media coverage,
and other collateral consequences. If any subpoenas or investigations are launched, or governmental or other sanctions are imposed, or
if we do not prevail in any possible civil or criminal litigation, our business, results of operations, and financial condition could
be materially harmed. In addition, responding to any action will likely result in a materially significant diversion of management’s
attention and resources and significant defense costs and other professional fees. Enforcement
actions and sanctions could further harm our reputation, business, results of operations, and financial condition.
If any person in the Cayman Islands knows or suspects,
or has reasonable grounds for knowing or suspecting that another person is engaged in criminal conduct or money laundering, or is involved
with terrorism or terrorist financing and property, and the information for that knowledge or suspicion came to their attention in the
course of business in the regulated section, or other trade, profession, business or employment, the person will be required to report
such knowledge or suspicion to (i) the Financial Reporting Authority of the Cayman Islands, or the FRA, pursuant to the Proceeds
of Crime Act (As Revised) of the Cayman Islands, if the disclosure relates to criminal conduct or money laundering, or (ii) a police
officer of the rank of constable or higher, or the FRA, pursuant to the Terrorism Act (As Revised) of the Cayman Islands, if the disclosure
relates to involvement with terrorism or terrorist financing and property. Such report shall not be treated as a breach of confidence
or of any restriction upon the disclosure of information imposed by any enactment or otherwise.
We and our independent registered public accounting firm
identified material weaknesses in our internal control over financial reporting for the year ended December 31, 2020. If we fail to maintain
effective internal controls over financial reporting, we may be unable to accurately report our results of operations, meet our reporting
obligations or prevent fraud.
Disclosure controls and procedures over financial reporting
are designed to provide reasonable assurance that information required to be disclosed by the Company is accumulated and communicated
to management, and recorded, processed, summarized and reported in accordance with applicable rules. These disclosure controls and procedures
have inherent limitations which include the possibility that judgments in decision-making can be faulty and that breakdowns occur because
of errors or mistakes. Additionally, controls can be circumvented by any unauthorized management override of controls. Consequently, our
businesses are exposed to risk from potential noncompliance with policies, employee misconduct or negligence and fraud, which could result
in regulatory sanctions, civil claims and serious reputational or financial harm. It is not always possible to deter employee misconduct
and the precautions we take to prevent and detect this activity may not always be effective. Accordingly, because of the inherent limitations
in the control system, misstatements due to error or fraud may occur and not be detected. For details of the controls mentioned above,
see the section of this annual report entitled “Item 15. Controls and Procedures—B. Management’s Annual Report on Internal
Control Over Financial Reporting.”
In the past (2020), we have identified material weaknesses
in our internal control over financial reporting (which has been remediated in 2021), and we cannot assure that significant deficiencies
or material weaknesses in our internal control over financial reporting will not be identified in the future. In addition, if we fail
to maintain the adequacy of our internal control over financial reporting, as the laws, regulations and policies standards are modified,
supplemented or amended from time to time, we may not be able to conclude on an ongoing basis that we have effective internal control
over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act of 2002. If we fail to maintain an effective internal
control environment, we could suffer material misstatements in our financial statements, fail to meet our reporting obligations or fail
to prevent fraud, which would likely cause investors to lose confidence in our reported financial information, the trading price of our
Class A common shares could decline, and we could be subject to sanctions or investigations by NASDAQ, the SEC or other regulatory authorities.
Failure to remedy any future material weakness in our internal controls over financial reporting, or to implement or maintain other effective
control systems required of public companies in the United States, could also restrict our future access to capital markets and reduce
or eliminate the trading market for our Class A common shares.
We may be adversely affected by the ongoing armed conflict
between Russia and Ukraine.
As a result of the current geopolitical tensions and
conflict between Russia and Ukraine, and the recent recognition by Russia of the independence of the self-proclaimed republics of Donetsk
and Luhansk in the Donbas region of Ukraine, the governments of the United States, the European Union, Japan and other jurisdictions have
recently announced the imposition of sanctions on certain industry sectors and parties in Russia, Belarus and the regions of Donetsk and
Luhansk, as well as enhanced export controls on certain products and industries. These and any additional sanctions and export controls,
as well as any counter responses by the governments of Russia or other jurisdictions, could adversely affect, directly or indirectly,
the global supply chain, with negative implications on the availability of raw materials, energy prices, and our customers, as well as
the local and global financial markets and financial services industry and the global economy in general, which has
also been impacted by the ongoing COVID-19 pandemic.
Climate change can create transition risks, physical
risks and other risks that could adversely affect us.
Climate risk is a transversal risk that can be an aggravating
factor for the types of traditional risks that we manage in the ordinary course of business, including, without limitation, the risks
described in this “Risk Factors” section. Based on the classifications used by the Taskforce on Climate-Related Financial
Disclosures, we consider that there are two primary sources of climate change-related financial risks: physical and transition.
Physical risks resulting from climate change can be event-driven
(acute) or long-term shifts (chronic) in climate patterns:
| · | Acute physical risks include increased severity of extreme weather events, such as drought, hurricanes, or floods; |
| · | Chronic physical risks include changes in precipitation patterns and extreme variability in weather patterns, rising mean temperatures,
chronic heat waves or rising sea levels; |
The main physical risks that can impact us are acute
physical risks that can disrupt our supply chain, or prevent our schools from operating normally.
Transition risks refer to actions to address mitigation
and adaptation requirements related to climate change, and they can fall into various categories such as market and technology changes:
| · | Market risk may manifest through shifts in supply and demand for certain commodities, products, and services, as climate-related risks
and opportunities are increasingly considered. |
| · | Technology risk arises from improvements or innovations to support the transition to a lower-carbon, energy-efficient economic system
that can have a significant impact on companies to the extent that new technology displaces old systems and disrupts some parts of the
existing economic system. One of our strategies to minimize our carbon footprint is to reduce the
number of physical pages we print as part our printed educational materials by making those educational materials available to students
digitally on our online platform. |
Policy actions generally fall
into two categories: those that attempt to constrain actions that contribute to the adverse effects of climate change and those that seek
to promote adaptation to climate change. The risk associated with, and the financial impact of policy changes depend on the nature and
timing of the policy change.
Our schools may be adversely
affected by increased regulatory requirements going forward as a result of the increasing importance of environmental matters, which may
indirectly affect our business. This and other changes in regulations in Brazil and international markets may expose us to increased compliance
costs, limit our ability to pursue certain business opportunities and provide certain products and services, each of which could adversely
affect our business, financial condition, and results of operations.
Certain Risks Relating to Brazil
The Brazilian federal government has exercised, and continues
to exercise, significant influence over the Brazilian economy. This involvement as well as Brazil’s political and economic conditions
could harm us and the price of our Class A common shares.
The Brazilian federal government frequently exercises
significant influence over the Brazilian economy and occasionally makes significant changes in policy and regulations. The Brazilian government’s
actions to control inflation and other policies and regulations have often involved, among other measures, increases or decreases in interest
rates, changes in fiscal policies, wage and price controls, foreign exchange rate controls, blocking access to bank accounts, currency
devaluations, capital controls and import and export restrictions. We have no control over and cannot predict what measures or policies
the Brazilian government may take in the future. We and the market price of our securities may be harmed by changes in Brazilian government
policies, as well as general economic factors, including, without limitation:
| · | growth or downturn of the Brazilian economy; |
| · | interest rates and monetary policies; |
| · | exchange rates and currency fluctuations; |
| · | liquidity of the domestic capital and lending markets, in particular in the current context of the COVID-19 pandemic; |
| · | import and export controls; |
| · | exchange controls and restrictions on remittances abroad and payments of dividends; |
| · | modifications to laws and regulations according to political, social and economic interests; |
| · | fiscal policy and changes in tax laws; |
| · | economic, political and social instability, including general strikes and mass demonstrations; |
| · | the regulatory framework governing the educational industry; |
| · | labor and social security regulations; |
| · | energy and water shortages and rationing; |
| · | changes in demographics, in particular declining birth rates, which will result in a decrease in the number of enrolled students in
education in the future; and |
| · | other political, diplomatic, social and economic developments in or affecting Brazil. |
Uncertainty over whether the Brazilian federal government
will implement reforms or changes in policy or regulation affecting these or other factors in the future may affect economic performance
and contribute to economic uncertainty in Brazil, which may have an adverse effect on our activities and consequently our operating results,
and may also adversely affect the trading price of our Class A common shares. Recent economic and political instability has led to a negative
perception of the Brazilian economy and higher volatility in the Brazilian securities markets, which also may adversely affect us and
our Class A common shares. See “Item 5. Operating and Financial Review and Prospects—Significant Factors Affecting Our Results
of Operations—Brazilian Macroeconomic Environment.”
Economic uncertainty and political instability in Brazil
may harm our business and the price of our Class A common shares.
Brazil’s political environment has historically
influenced, and continues to influence, the performance of the country’s economy. Political crises have affected and continue to
affect the confidence of investors and the general public, which have historically resulted in economic deceleration and heightened volatility
in the securities offered by companies with significant operations in Brazil. This scenario is further aggravated when analyzed together
with the impacts of the COVID-19 pandemic, which may adversely affect our business, operations, results and share price.
The recent economic instability in Brazil has contributed
to a decline in market confidence in the Brazilian economy as well as to a deteriorating political environment. In addition, various ongoing
investigations into allegations of money laundering and corruption being conducted by the Office of the Brazilian Federal Prosecutor,
including the largest such investigation, known as “Operação Lava Jato,” have negatively impacted the
Brazilian economy and political environment. The potential outcome of these investigations is uncertain, but they have already had an
adverse impact on the image and reputation of the implicated companies, and on the general market perception of the Brazilian economy.
We cannot predict whether the ongoing investigations will result in further political and economic instability, or if new allegations against government
officials and/or executives of private companies will arise in the future.
In addition, political demonstrations in Brazil over
the last few years have affected the development of the Brazilian economy and investors’ perceptions of Brazil. For example, street
protests, which started in mid-2013 and continued through 2016, demonstrated the public’s dissatisfaction with the worsening Brazilian
economic condition (including an increase in inflation and fuel prices as well as rising unemployment), and the perception of widespread
corruption. Moreover, on October 30, 2022, Luis Inácio Lula da Silva won the Brazilian presidential election and took office on
January 1, 2023. It is unclear if and for how long the political divisions that arose before the election will continue under President
Lula’s presidency and the effects that such divisions will have on his ability to govern Brazil and implement reforms. Since the
results of the presidential election have been announced and as of the date of this annual report, certain groups formed by extreme supporters
of the defeated candidate have been organizing public demonstrations and protests against the electronic ballot boxes and the existence
of an alleged conspiracy against their candidate. Any attempts to contest or otherwise undermine the results of the election, or other
potential threats to the democratic system, may result in deterioration of the political environment and, as a consequence, affect the
confidence of investors and the general public. The continuation of any such political divisions may result in a congressional impasse,
political unrest, protests or strikes that materially adversely affect us.
In addition, uncertainties relating to the implementation
by the new Brazilian government of changes to monetary, fiscal and social security policy and related legislation may contribute to economic
instability. These uncertainties and new measures may increase the volatility of the Brazilian capital markets. Aa failure by the Brazilian
government to implement necessary reforms may result in diminished confidence in the Brazilian government’s budgetary condition
and fiscal stance, which could result in downgrades of Brazil’s sovereign foreign credit rating by credit rating agencies, negatively
impact Brazil’s economy, and lead to further depreciation of the real and an increase in inflation and interest rates, which
could adversely affect our business, financial condition and results of operations. Any of the above factors may harm the Brazilian economy
and, consequently, our business and the price of our Class A common shares.
Inflation and certain measures by the Brazilian government
to curb inflation have historically harmed the Brazilian economy and Brazilian capital markets, and high levels of inflation in the future
would harm our business and the price of our Class A common shares.
In the past, Brazil has experienced extremely high rates
of inflation. Inflation and some of the measures taken by the Brazilian government in an attempt to curb inflation have had significant
negative effects on the Brazilian economy generally. Inflation, policies adopted to curb inflationary pressures and uncertainties regarding
possible future governmental intervention have contributed to economic uncertainty and heightened volatility in the Brazilian capital
markets.
According to the National Consumer Price Index (Índice
Nacional de Preços ao Consumidor Amplo, or IPCA), which is published by the Brazilian Institute for Geography and Statistics
(Instituto Brasileiro de Geografia e Estatística, or IBGE), Brazilian inflation rates were 4.5%, 10.1% and 5.8% as of December 31,
2020, 2021 and 2022, respectively. Brazil may experience high levels of inflation in the future and inflationary pressures may lead to
the Brazilian government intervening in the economy and introducing policies that could harm our business and the trading price of our
Class A common shares. In the past, the Brazilian government’s interventions included the maintenance of a restrictive monetary
policy with high interest rates that restricted credit availability and reduced economic growth, causing volatility in interest rates.
For example, the official interest rate in Brazil decreased from 14.25% as of December 31, 2015, to 4.50% as of December 31,
2018, as established by the Monetary Policy Committee (Comitê de Política Monetária do Banco Central do Brasil),
or COPOM. On February 7, 2018, the COPOM reduced the base interest rate (Sistema Especial de Liquidação e Custódia)
or the SELIC rate, to 6.75% and further reduced the SELIC rate to 6.50% on March 21, 2018. The COPOM reconfirmed the SELIC rate of
6.50% on May 16, 2018, and subsequently on June 20, 2018. As of December 31, 2018, the SELIC rate was 6.50%. The COPOM reconfirmed
the SELIC rate of 6.50% on February 6, 2019, but reduced the SELIC rate to 6.00% on August 1, 2019 and further reduced the rate to 4.50%
on December 12, 2019. On February 5, 2020, the COPOM reduced the SELIC rate to 4.25% and further reduced the rate to 3.75% on March 18,
2020, to 3.00% on June 5, 2020, to 2.25% on June 17, 2020, to 2.00% on August 5, 2020. On March 17, 2021, the COPOM raised the SELIC rate
to 2.75% and further raised the SELIC rate to 3.50% on May 5, 2021, to 4.25% on June 16, 2021, to 5.25% on August 4, 2021, to 6.25% on
September 22, 2021, to 7.75% on October 27, 2021, to 9.25% on December 8, 2021, to 10.75% on February 2, 2022 and to 11.75% on March 16,
2022. As of the date of this annual report, the SELIC rate is 13.75%. Conversely, more lenient government and Central Bank policies
and interest rate decreases have triggered and may continue to trigger increases in inflation, and, consequently, growth volatility and
the need for sudden and significant interest rate increases, which could negatively affect us and our financial condition.
Exchange rate instability may have adverse effects on
the Brazilian economy, us and the price of our Class A common shares.
The Brazilian currency has been historically volatile
and has been devalued frequently over the past three decades. Throughout this period, the Brazilian government has implemented various
economic plans and used various exchange rate policies, including sudden devaluations, periodic mini-devaluations (during which the frequency
of adjustments has ranged from daily to monthly), exchange controls, dual exchange rate markets and a floating exchange rate system. Although
long-term depreciation of the real is generally linked to the rate of inflation in Brazil, depreciation of the real occurring over shorter
periods of time has resulted in significant variations in the exchange rate between the real, the U.S. dollar and other currencies.
The real/U.S. dollar exchange rate reported by the Central
Bank was R$4.031 per US$1.00 on December 31, 2019, which reflected a 4.0% depreciation in the real against the U.S. dollar during 2019.
The real/U.S. dollar exchange rate reported by the Central Bank was R$5.196 per US$1.00 on December 31, 2020, which reflected a 22.4%
depreciation in the real against the U.S. dollar during 2020. The real/U.S. dollar exchange rate reported by the Central Bank was R$5.580
per US$1.00 on December 31, 2021, which reflected a 7.3% depreciation in the real against the U.S. dollar during 2020. On December 31,
2022, the exchange rate of U.S. dollar as reported by the Central Bank was R$5.218 per US$1.00, which reflected a 6.5% appreciation in
the real against the U.S. dollar since December 31, 2021. As of April 26, 2023, the exchange rate for the sale of U.S. dollars as reported
by the Central Bank was R$5.059 per US$1.00, which reflected an appreciation of 3.1% in the real against the U.S. dollar since December
31, 2022. There can be no assurance that the real will not again depreciate or appreciate against the U.S. dollar or other currencies
in the future.
A devaluation of the real relative to the U.S.
dollar could create inflationary pressures in Brazil and cause the Brazilian government to, among other measures, increase interest rates.
Any depreciation of the real may generally restrict access to the international capital markets. It would also reduce the U.S.
dollar value of our results of operations. Restrictive macroeconomic policies could reduce the stability of the Brazilian economy and
harm our results of operations and profitability. In addition, domestic and international reactions to restrictive economic policies could
have a negative impact on the Brazilian economy. These policies and any reactions to them may harm us by curtailing access to foreign
financial markets and prompting further government intervention. A devaluation of the real relative to the U.S. dollar may also,
as in the context of the current economic slowdown, decrease consumer spending, increase deflationary pressures and reduce economic growth.
On the other hand, an appreciation of the real relative
to the U.S. dollar and other foreign currencies may deteriorate the Brazilian foreign exchange current accounts. Depending on the circumstances,
either devaluation or appreciation of the real relative to the U.S. dollar and other foreign currencies could restrict the growth
of the Brazilian economy, as well as our business, results of operations and profitability.
Infrastructure and workforce deficiency in Brazil may
impact economic growth and have a material adverse effect on us.
Our performance depends on the overall health and growth
of the Brazilian economy. Brazilian GDP growth has fluctuated over the past few years, with growth of 3.0% in 2013 but decreasing to 0.5%
in 2014, a contraction of 3.5% in 2015, a contraction of 3.3% in 2016, a growth of 1.0% in 2017, a growth of 1.1% in 2018 and 1.1% in
2019, a contraction of 4.1% in 2020, a growth of 4.6% in 2021, and a growth of 3.0% in 2022. Growth is limited by inadequate infrastructure,
including potential energy shortages and deficient transportation, logistics and telecommunication sectors, general strikes, the lack
of a qualified labor force, and the lack of private and public investments in these areas, which limit productivity and efficiency. Any
of these factors could lead to labor market volatility and generally impact income, purchasing power and consumption levels, which could
limit growth and ultimately have a material adverse effect on us.
Developments and the perceptions of risks in other countries,
including other emerging markets, the United States and Europe, may harm the Brazilian economy and the price of our Class A common shares.
The market for securities offered by companies with significant
operations in Brazil is influenced by economic and market conditions in Brazil and, to varying degrees, market conditions in other Latin
American and emerging markets, as well as the United States, Europe and other countries. To the extent the conditions of the global markets
or economy deteriorate, including as a result of, among other things, the ongoing war between Russian and the Ukraine, the COVID-19 outbreak,
the United Kingdom’s decision to leave the European Union, the business of companies with significant operations in Brazil may be
harmed. The weakness in the global economy has been marked by, among other adverse factors, lower levels of consumer and corporate confidence,
decreased business investment and consumer spending, increased unemployment, reduced income and asset values in many areas, reduction
of China’s growth rate, currency volatility and limited availability of credit and access to capital. Developments or economic conditions
in other emerging market countries have at times significantly affected the availability of credit to companies with significant operations
in Brazil and resulted in considerable outflows of funds from Brazil, decreasing the amount of foreign investments in Brazil. These developments,
as well as potential crises and forms of political instability arising therefrom or any other as of yet unforeseen development, may harm
our business and the price of our Class A common shares.
In addition, public health crises, pandemics and epidemics,
could have a material adverse effect on global, national and local economies, as well as on our business, our subsidiaries and our students
by disrupting our activities and delaying transactional activities (including acquisitions). For instance, the outbreak of COVID-19 has
severely impacted global economic activity and caused significant volatility and negative pressure in the financial markets. The potential
impact of a pandemic, epidemic or outbreak of a contagious disease on our subsidiaries and our students is difficult to predict, and could
have a material adverse effect on our results of operations and financial condition, as well as heighten the volatility of the price of
our Class A common shares. See “—Certain Risks Relating to Our Business and Industry—Public health outbreaks, epidemics
or pandemics, such as the COVID-19 pandemic, have adversely affected and may continue to adversely affect our business.”
Any further downgrading of Brazil’s credit rating
could reduce the trading price of our Class A common shares.
We and the trading price of our Class A common shares
may be harmed by investors’ perceptions of risks related to Brazil’s sovereign debt credit rating. Rating agencies regularly
evaluate Brazil and its sovereign credit ratings, which are based on a number of factors, including macroeconomic trends, fiscal and budgetary
conditions, indebtedness metrics and the perspective of changes in any of these factors.
The rating agencies began to review Brazil’s sovereign
credit rating in September 2015. Subsequently, the three major rating agencies downgraded Brazil’s investment-grade status:
| · | In 2015, Standard & Poor’s initially downgraded Brazil’s credit rating from BBB-negative to BB-positive and subsequently
downgraded it again from BB-positive to BB, maintaining its negative outlook, citing a worse credit situation since the first downgrade.
On January 11, 2018, Standard & Poor’s further downgraded Brazil’s credit rating from BB to BB-negative, and
on December 11, 2019, the agency affirmed the rating at BB- and revised the outlook on Brazil to positive. On April 7, 2020,
the rating was reaffirmed as BB- with a stable outlook, reflecting uncertainties stemming from the coronavirus pandemic, along with how
extraordinary government spending would adversely affect the fiscal performance in 2020. On November
30, 2021 and June 15, 2022, Standard & Poor’s further reaffirmed Brazil’s rating at BB- with a stable outlook. |
| · | In December 2015, Moody’s placed Brazil’s Baa3’s issue and bond ratings under review for downgrade and subsequently
downgraded the issue and bond ratings to below investment grade, at Ba2 with a negative outlook, citing the prospect of a further deterioration
in Brazil’s debt indicators, taking into account the low growth environment and the challenging political scenario. On April 9,
2018, Moody’s revised the outlook to stable, reaffirming the Ba2 rating. In September 2020, Moody’s maintained Brazil’s
credit rating at Ba2 with a stable outlook. In May 2020, Moody’s confirmed Brazil’s long-term foreign currency sovereign credit
rating at Ba2 maintaining the stable outlook. On May 25, 2021 and April 12, 2022, Moody’s
further reaffirmed Brazil’s rating at Ba2 with a stable outlook. |
| · | Fitch downgraded Brazil’s sovereign credit rating to BB-positive with a negative outlook, citing the rapid expansion of the
country’s budget deficit and the worse-than-expected recession. In February 2018, Fitch downgraded Brazil’s sovereign credit
rating again to BB-negative, citing, among other reasons, fiscal deficits, the increasing burden of public debt and an inability to implement
reforms that would structurally improve Brazil’s public finances. In November 2020, Fitch Ratings affirmed Brazil’s long-term
foreign currency sovereign credit rating at BB- with a negative outlook. On December 14, 2021, Fitch
further reaffirmed Brazil’s credit rating at BB-negative with a negative outlook. On July 14, 2022, while reaffirming Brazil’s
credit rating at BB-negative, Fitch changed its outlook on Brazil’s credit rating to a positive outlook. |
Brazil’s sovereign credit rating is currently rated
below investment grade by the three main credit rating agencies. Consequently, the prices of securities offered by companies with significant
operations in Brazil have been negatively affected. A prolongation or worsening of the current Brazilian recession and continued political
uncertainty, among other factors, could lead to further ratings downgrades. Any further downgrade of Brazil’s sovereign foreign
credit ratings could heighten investors’ perception of risk and, as a result, cause the trading price of our Class A common shares
to decline.
Certain Risks Relating to Our Class A Common Shares
An active trading market for our Class A common shares
may not be sustainable. If an active trading market is not maintained, investors may not be able to resell their shares and our ability
to raise capital in the future may be impaired.
Although our Class A common shares are listed and being
traded on the Nasdaq Global Select Market, an active trading market for our shares may not be maintained. If an active market for our
Class A common shares is not maintained, it may be difficult for you to sell shares without depressing the market price for the shares
or at all. An inactive trading market may also impair our ability to raise capital to continue to fund operations by selling shares and
may impair our ability to acquire other companies or technologies by using our shares as consideration. In addition to the risks described
above, the market price of our Class A common shares may be influenced by many factors, some of which are beyond our control, including:
| · | announcements by us or our competitors of significant contracts or acquisitions; |
| · | technological innovations by us or competitors; |
| · | the failure of financial analysts to cover our Class A common shares or changes in financial estimates by analysts; |
| · | actual or anticipated variations in our operating results; |
| · | changes in financial estimates by financial analysts, or any failure by us to meet or exceed any of these estimates, or changes in
the recommendations of any financial analysts that elect to follow our Class A common shares or the shares of our competitors; |
| · | future sales of our shares; and |
| · | investor perceptions of us and the industries in which we operate. |
In addition, the stock market in general has experienced
substantial price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of particular
companies affected. These broad market and industry factors may materially harm the market price of our Class A common shares, regardless
of our operating performance. In the past, following periods of volatility in the market price of certain companies’ securities,
securities class action litigation has been instituted against these companies. This litigation, if instituted against us, could adversely
affect our financial condition or results of operations. If a market is not maintained, the liquidity and price of our Class A common
shares could be seriously harmed.
The concentration of ownership and voting power in Bertelsmann,
our controlling shareholder, limits your ability to influence corporate matters.
Bertelsmann, our controlling shareholder, as of the date
of this annual report, owns 63.5% of our outstanding Class B common shares, which, together with its ownership of 20.4% of our outstanding
Class A common shares, represent approximately 41.5% of our issued share capital and 59.4% of the voting power of our issued share capital,
and, together with the Esteves Family, controls all matters requiring shareholder approval. Our Class B common shares are entitled to
10 votes per share and our Class A common shares, which are the common shares trading on NASDAQ, are entitled to one vote per share. Our
Class B common shares are convertible into an equivalent number of Class A common shares and generally convert into Class A common shares
upon transfer subject to limited exceptions. As a result, Bertelsmann and the Esteves Family will control the outcome of all of our decisions
at our shareholders’ meetings, and Bertelsmann alone is able to elect a majority of the members of our board of directors. The decisions
of Bertelsmann and the Esteves Family on these matters may be contrary to your expectations or preferences, and they may take actions
that could be contrary to your interests. They are able to prevent any other shareholders, including you, from blocking these actions.
For further information regarding shareholdings in our company, see “Item 7. Major Shareholders and Related Party Transactions—A.
Major Shareholders.”
So long as Bertelsmann and the Esteves Family continue
to beneficially own a sufficient number of Class B common shares, even if they beneficially own significantly less than 50% of our outstanding
share capital, acting together, they will be able to effectively control the outcome of all decisions at our shareholders’ meetings.
For example, if our Class B common shares amounted to 15% of our outstanding common shares, beneficial owners of our Class B common shares
(consisting of the Esteves Family and Bertelsmann), would collectively control 63.8% of the voting power of our outstanding common shares.
If Bertelsmann sells or transfers any of its Class B common shares, they will generally convert automatically into Class A common shares,
subject to limited exceptions, such as transfers to affiliates, to trustees for the holder or its affiliates and certain transfers to
U.S. tax exempt organizations. The fact that any Class B common shares convert into Class A common shares if Bertelsmann sells or transfers
them means that Bertelsmann will in many situations continue to control a majority of the combined voting power of our outstanding share
capital, due to the voting rights of any Class B common shares that it will retain. However, if our Class B common shares at any time
represent less than 10% of the total number of shares in the capital of the Company outstanding, the Class B common shares then outstanding
will automatically convert into Class A common shares. For a description of our dual class equity structure, see “Item 10. Additional
Information—B. Memorandum and Articles of Association—Description of Share Capital.”
Class A common shares eligible for future sale may cause
the market price of our Class A common shares to drop significantly.
The market price of our Class A common shares may decline
as a result of sales of a large number of our Class A common shares in the market (including Class A common shares issuable upon conversion
of Class B common shares) or the perception that these sales may occur. These sales, or the possibility that these sales may occur, also
might make it more difficult for us to sell equity securities in the future at a time and at a price that we deem appropriate.
As of December 31, 2022, we have outstanding 47,920,068
Class A common shares and 45,802,763 Class B common shares which, except as set forth below, are freely tradable without restriction or
further registration under the Securities Act by persons other than our affiliates within the meaning of Rule 144 of the Securities Act.
Our shareholders or entities controlled by them or their
permitted transferees will be able to sell their shares in the public market from time to time without registering them, subject to certain
limitations on the timing, amount and method of those sales imposed by regulations promulgated by the SEC.
If any of our shareholders, the affiliated entities controlled
by them or their respective permitted transferees were to sell a large number of their shares, including common shares issuable upon conversion
of the Series A perpetual convertible preferred shares, the market price of our Class A common shares may decline significantly. In addition,
the perception in the public markets that sales by them might occur may also adversely affect the market price of our Class A common shares.
Our Articles of Association contain anti-takeover provisions
that may discourage a third party from acquiring us and adversely affect the rights of holders of our Class A common shares.
Our Articles of Association contain certain provisions
that could limit the ability of others to acquire our control, including a provision that grants authority to our board of directors to
establish and issue from time to time one or more series of preferred shares without action by our shareholders and to determine, with
respect to any series of preferred shares, the terms and rights of that series. These provisions could have the effect of depriving our
shareholders of the opportunity to sell their shares at a premium over the prevailing market price by discouraging third parties from
seeking to obtain our control in a tender offer or similar transactions.
If securities or industry analysts publish inaccurate
or unfavorable research, about our business, the price of our Class A common shares and our trading volume could decline.
The trading market for our Class A common shares will
depend in part on the research and reports that securities or industry analysts publish about us, our business, our market or our competitors.
In the event one or more of the analysts who covers us downgrades us or releases negative publicity about our Class A common shares, our
share price would likely decline.
Further, as we are not required to publish quarterly
financial information, if we cease to publish that information, any analysts covering us may not have enough information to compare us
to our peers on a regular basis and may choose to cease coverage. If one or more of these analysts ceases to cover us or fails to regularly
publish reports on us, interest in our Class A common shares may decrease, which may cause our share price or trading volume to decline.
It is unlikely that we will declare any dividends on
our common shares in the foreseeable future and therefore, you must rely on price appreciation of our common shares for a return on your
investment.
We do not anticipate paying any dividends in the foreseeable
future. Instead, we intend to retain earnings, if any, to fund the operation of our business and future growth. Any decision to declare
and pay dividends in the future will be made at the discretion of our general meeting of shareholders, acting pursuant to a proposal by
our board of directors, or by our board, and will depend on, among other things, our results of operations, cash requirements, financial
condition, contractual restrictions (including under our outstanding Series A perpetual convertible preferred shares) and other factors
that our general meeting of shareholders or board of directors may deem relevant. Accordingly, investors will most likely have to rely
on sales of their common shares, which may increase or decrease in value, as the only way to realize cash from their investment. As a
result, capital appreciation in the price of our Class A common shares, if any, will be your only source of gain on an investment in our
Class A common shares. There is no guarantee that the price of our common shares will ever exceed the price that you pay.
Our Series A perpetual convertible preferred shares have
rights, preferences and privileges that are not held by, and are preferential to, the rights of our common shares, which could adversely
affect our liquidity and financial condition, and may result in the interests of the holders of our Series A perpetual convertible preferred
shares differing from those of our common shareholders.
The Series A perpetual convertible preferred shares ranks
senior to our common shares with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation,
dissolution or winding up of our affairs. The holders of Series A perpetual convertible preferred shares have the right to receive a liquidation
preference entitling them to be paid out of our assets available for distribution to stockholders before any payment may be made to holders
of any other class or series of our share capital, an amount equal to the greater of (a) the sum of the original liquidation preference
plus all accrued but unpaid dividends or (b) the amount that such holder would have been entitled to receive upon our liquidation, dissolution
and winding up if all outstanding shares of such series of Series A perpetual convertible preferred shares had been converted into common
shares immediately prior to such liquidation, dissolution or winding up. In addition, the holders of the Series A perpetual convertible
preferred shares are entitled to a cumulative dividend at the rate of 6.5% per annum. The holders of the Series A perpetual convertible
preferred shares are also entitled to participate in dividends declared or paid on our common shares on an as-converted basis. The holders
of our Series A perpetual convertible preferred shares also have the right, subject to certain exceptions, to require us to repurchase
all or any portion of the Series A perpetual convertible preferred shares upon certain change of control events at the repurchase price
set forth in the applicable certificate of designations.
These dividend and share repurchase obligations could
impact our liquidity and reduce the amount of cash flows available for general corporate purposes. Our obligations to the holders of the
Series A perpetual convertible preferred shares could also limit our ability to obtain additional financing or increase our borrowing
costs, which could have an adverse effect on our financial condition. These preferential rights could also result in divergent interests
between the holders of shares of Series A perpetual convertible preferred shares and holders of our common shares.
The issuance of Series A perpetual convertible preferred
shares reduces the relative voting power of holders of our common stock, and the conversion and sale of those shares would dilute the
ownership of holders of common shares and may adversely affect the market price of our common shares.
As of December 31, 2022, 150,000 Series A perpetual convertible
preferred shares were outstanding, representing approximately 6.6% of our outstanding common shares, including the Series A perpetual
convertible preferred shares on an as-converted basis. Holders of Series A perpetual convertible preferred shares are entitled to a cumulative
dividend at the rate of 6.5% per annum. Because holders of our Series A perpetual convertible preferred shares are entitled to vote on
certain matters described in “—SoftBank and any other holders of our Series A perpetual convertible preferred shares may exercise
influence over us,” the issuance of the Series A perpetual convertible preferred shares, and the subsequent issuance of additional
Series A perpetual convertible preferred shares, effectively reduce the relative voting power of the holders of our common shares.
In addition, the conversion of the Series A perpetual
convertible preferred shares into common shares would dilute the ownership interest of existing holders of our common shares. Furthermore,
any sales in the public market of the common shares issuable upon conversion of the Series A perpetual convertible preferred shares would
increase the number of shares of our common shares available for public trading, and could adversely affect prevailing market prices of
our common shares. Sales of a substantial number of shares of our common shares in the public market, or the perception that such sales
might occur, could have a material adverse effect on the price of our common shares.
SoftBank and any other holders of our Series A perpetual
convertible preferred shares may exercise influence over us.
As of December 31, 2022, outstanding Series A perpetual
convertible preferred shares represented approximately 6.6% of our outstanding common shares, including the Series A perpetual convertible
preferred shares on an as-converted basis. The terms of the Series A perpetual convertible preferred shares require the approval of a
majority of our Series A perpetual convertible preferred shares by a separate class vote for us to take the following decisions, among
others described in the respective certificate of designations:
| · | amend our organizational documents in a manner that would have an adverse effect on the Series A perpetual convertible preferred shares;
or |
| · | issue securities that are senior to, or equal in priority with, the Series A perpetual convertible preferred shares. |
Circumstances may occur in which the interests of SoftBank
and its affiliates could diverge from, or even conflict with, the interests of our other shareholders. For example, the existence of SoftBank
as a significant shareholder may have the effect of delaying or preventing changes in control or management or limiting the ability of
our other shareholders to approve transactions that they may deem to be in our best interests. SoftBank and its affiliates may seek to
cause us to take courses of action that, in their judgment, could enhance its investment in us but which might involve risks to our other
shareholders or adversely affect us or our other shareholders.
Our dual class equity structure means our shares will
not be included in certain indices. We cannot predict the impact this may have on our share price.
In 2017, FTSE Russell, S&P Dow Jones and MSCI announced
changes to their eligibility criteria for inclusion of shares of public companies on certain indices to exclude companies with multiple
classes of shares of common stock from being added to such indices. FTSE Russell announced plans to require new constituents of its indices
to have at least five percent of their voting rights in the hands of public stockholders, whereas S&P Dow Jones announced that companies
with multiple share classes, such as ours, will not be eligible for inclusion in the S&P 500, S&P MidCap 400 and S&P SmallCap 600, which together make up
the S&P Composite 1500. MSCI also opened public consultations on their treatment of no-vote and multi-class structures and temporarily
barred new multi-class listings from its ACWI Investable Market Index and U.S. Investable Market 2500 Index; however, in October 2018,
MSCI announced its decision to include equity securities “with unequal voting structures” in its indices and to launch a new
index that specifically includes voting rights in its eligibility criteria.
We cannot assure you that other stock indices will not
take a similar approach to FTSE Russell, S&P Dow Jones and MSCI in the future. Under the announced policies, our dual class equity
structure would make us ineligible for inclusion in any of these indices and, as a result, mutual funds, exchange-traded funds and other
investment vehicles that attempt to passively track these indices will not invest in our stock. It continues to be somewhat unclear what
effect, if any, these policies will have on the valuations of publicly traded companies excluded from the indices, but in certain situations
they may depress these valuations compared to those of other similar companies that are included. Exclusion from indices could make our
Class A common shares less attractive to investors and, as a result, the market price of our Class A common shares could be adversely
affected.
The dual class equity structure of our common stock has
the effect of concentrating voting control with Bertelsmann; this will limit or preclude your ability to influence corporate matters.
Each Class A common share entitles its holder to one
vote per share, and each Class B common share entitles its holder to 10 votes per share, so long as the total number of the issued and
outstanding Class B common shares is at least 10% of the total number of shares outstanding. Due to the 10-to-one voting ratio between
our Class B and Class A common shares, the beneficial owners of our Class B common shares (composed of the Esteves Family and Bertelsmann)
collectively will continue to control a majority of the combined voting power of our common shares and therefore be able to control all
matters submitted to our shareholders so long as the total number of the issued and outstanding Class B common shares is at least 10%
of the total number of shares outstanding.
In addition, our Articles of Association provide that
at any time when there are Class A common shares in issue, additional Class B common shares may only be issued pursuant to (1) a
share split, subdivision of shares or similar transaction or where a dividend or other distribution is paid by the issue of shares or
rights to acquire shares or following capitalization of profits, (2) a merger, consolidation, or other business combination involving
the issuance of Class B common shares as full or partial consideration, or (3) an issuance of Class A common shares, whereby holders
of the Class B common shares are entitled to purchase a number of Class B common shares that would allow them to maintain their proportional
ownership interests in Afya (following an offer by us to each holder of Class B common shares to issue to such holder, upon the same economic
terms and at the same price, such number of Class B common shares as would ensure such holder may maintain a proportional ownership interest
in Afya pursuant to our Articles of Association).
Future transfers by holders of Class B common shares
will generally result in those shares converting to Class A common shares, subject to limited exceptions, such as certain transfers effected
to permitted transferees or for estate planning or charitable purposes. The conversion of Class B common shares to Class A common shares
will have the effect, over time, of increasing the relative voting power of those holders of Class B common shares who retain their shares
in the long term.
In light of the above provisions relating to the issuance
of additional Class B common shares, the fact that future transfers by holders of Class B common shares will generally result in those
shares converting to Class A common shares, subject to limited exceptions as provided in the Articles of Association; as well as the 10-to-one
voting ratio of our Class B common shares and Class A common shares, holders of our Class B common shares will in many situations continue
to maintain control of all matters requiring shareholder approval. This concentrated control will limit or preclude your ability to influence
corporate matters for the foreseeable future. For a description of our dual class equity structure, see “Item 10. Additional Information—B.
Memorandum and Articles of Association—Description of Share Capital—Voting Rights.”
We are a Cayman Islands exempted company with limited
liability. The rights of our shareholders, including with respect to fiduciary duties and corporate opportunities, may be different from
the rights of shareholders governed by the laws of U.S. jurisdictions.
We are a Cayman Islands exempted company with limited
liability. Our corporate affairs are governed by our Articles of Association and by the laws of the Cayman Islands. The rights of shareholders
and the responsibilities of members of our board of directors may be different from the rights of shareholders
and responsibilities of directors in companies governed by the laws of U.S. jurisdictions. In particular, as a matter of Cayman Islands
law, directors of a Cayman Islands company owe fiduciary duties to the company and separately a duty of care, diligence and skill to the
company.
Under Cayman Islands law, directors and officers owe
the following fiduciary duties: (i) duty to act in good faith in what the director or officer believes to be in the best interests
of the company as a whole; (ii) duty to exercise powers for the purposes for which those powers were conferred and not for a collateral
purpose; (iii) directors should not improperly fetter the exercise of future discretion; (iv) duty to exercise powers fairly
as between different sections of shareholders; (v) duty to exercise independent judgment; and (vi) duty not to put themselves
in a position in which there is a conflict between their duty to the company and their personal interests. Our Articles of Association
have varied this last obligation by providing that a director must disclose the nature and extent of his or her interest in any contract
or arrangement, and following such disclosure and subject to any separate requirement under applicable law or the listing rules of the
Nasdaq, and unless disqualified by the chairman of the relevant meeting, such director may vote in respect of any transaction or arrangement
in which he or she is interested and may be counted in the quorum at the meeting. Conversely, under Delaware corporate law, a director
has a fiduciary duty to the corporation and its stockholders (made up of two components) and the director’s duties prohibit self-dealing
by a director and mandate that the best interest of the corporation and its shareholders take precedence over any interest possessed by
a director, officer or controlling shareholder and not shared by the shareholders generally. See “Item 10. Additional Information—B.
Memorandum and Articles of Association—Description of Share Capital—Principal Differences between Cayman Islands and U.S.
Corporate Law.”
We may need to raise additional capital in the future
by issuing securities, use our Class A common shares as acquisition consideration or enter into corporate transactions with an effect
similar to a merger, which may dilute your interest in our share capital and affect the trading price of our Class A common shares.
We may need to raise additional funds to grow our business
and implement our growth strategy going forward through public or private issuances of common shares or securities convertible into, or
exchangeable for, our common shares, which may dilute your interest in our share capital or result in a decrease in the market price of
our common shares. In addition, we may also use our Class A common shares as acquisition consideration or enter into mergers or other
similar transactions in the future, which may dilute your interest in our share capital or result in a decrease in the market price of
our Class A common shares. Any fundraising through the issuance of shares or securities convertible into or exchangeable for shares, the
use of our Class A common shares as acquisition consideration, or the participation in corporate transactions with an effect similar to
a merger, may dilute your interest in our capital stock or result in a decrease in the market price of our Class A common shares.
As a foreign private issuer, we have different disclosure
and other requirements than U.S. domestic registrants and non-emerging growth companies.
As a foreign private issuer, we are subject to different
disclosure and other requirements than domestic U.S. registrants. For example, as a foreign private issuer, in the United States, we are
not subject to the same disclosure requirements as a domestic U.S. registrant under the Exchange Act, including the requirements to prepare
and issue quarterly reports on Form 10-Q or to file current reports on Form 8-K upon the occurrence of specified significant events, the
proxy rules applicable to domestic U.S. registrants under Section 14 of the Exchange Act or the insider reporting and short-swing profit
rules applicable to domestic U.S. registrants under Section 16 of the Exchange Act. In addition, we rely on exemptions from certain U.S.
rules which permit us to follow Cayman Islands legal requirements rather than certain of the requirements that are applicable to U.S.
domestic registrants.
We follow Cayman Islands laws and regulations that are
applicable to Cayman Islands companies. However, Cayman Islands laws and regulations applicable to Cayman Islands companies do not contain
any provisions comparable to the U.S. proxy rules, the U.S. rules relating to the filing of reports on Form 10-Q or 8-K or the U.S. rules
relating to liability for insiders who profit from trades made in a short period of time, as referred to above.
Furthermore, foreign private issuers are required to
file their annual report on Form 20-F within 120 days after the end of each fiscal year, while U.S. domestic issuers that are accelerated
filers are required to file their annual report on Form 10-K within 75 days after the end of each fiscal year. Foreign private issuers
are also exempt from Regulation Fair Disclosure, aimed at preventing issuers from making selective disclosures of material information,
although we will be subject to Cayman Islands laws and regulations having substantially the same effect as Regulation Fair Disclosure. As a result of the above, even though we are
required to file reports on Form 6-K disclosing the limited information which we have made or are required to make public pursuant to
Cayman Islands law, or are required to distribute to shareholders generally, and that is material to us, you may not receive information
of the same type or amount that is required to be disclosed to shareholders of a U.S. company.
As a foreign private issuer, we rely on permitted exemptions
from certain Nasdaq corporate governance standards applicable to U.S. issuers, including the requirement that a majority of an issuer’s
directors consist of independent directors. This may afford less protection to holders of our Class A common shares.
Section 5605 of the Nasdaq equity rules requires listed
companies to have, among other things, a majority of their board members be independent, and to have independent director oversight of
executive compensation, nomination of directors and corporate governance matters. As a foreign private issuer, however, we are permitted
to, and we will, follow home country practice in lieu of the above requirements. See “Item 10. Additional Information—B. Memorandum
and Articles of Association—Description of Share Capital—Principal Differences between Cayman Islands and U.S. Corporate Law.”
We may lose our foreign private issuer status, which
would then require us to comply with the Exchange Act’s domestic reporting regime and cause us to incur significant legal, accounting
and other expenses.
In order to maintain our current status as a foreign
private issuer, either (a) more than 50% of our Class A common shares must be either directly or indirectly owned of record by non-residents
of the United States or (b)(i) a majority of our executive officers or directors may not be U.S. citizens or residents, (ii) more
than 50% of our assets cannot be located in the United States and (iii) our business must be administered principally outside the
United States. If we lose this status, we would be required to comply with the Exchange Act reporting and other requirements applicable
to U.S. domestic issuers, which are more detailed and extensive than the requirements for foreign private issuers. We may also be required
to make changes in our corporate governance practices in accordance with various SEC and Nasdaq rules. The regulatory and compliance costs
to us under U.S. securities laws if we are required to comply with the reporting requirements applicable to a U.S. domestic issuer may
be significantly higher than the costs we will incur as a foreign private issuer.
Our shareholders may face difficulties in protecting
their interests because we are a Cayman Islands exempted company.
Our corporate affairs are governed by our Articles of
Association, by the Companies Act (As Revised) of the Cayman Islands and the common law of the Cayman Islands. The rights of our shareholders
and the fiduciary responsibilities of our directors under the laws of the Cayman Islands are not as clearly established as they would
be under statutes or judicial precedent in some jurisdictions in the United States. Therefore, you may have more difficulty protecting
your interests than would shareholders of a corporation incorporated in a jurisdiction in the United States, due to the comparatively
less formal nature of Cayman Islands law in this area.
While Cayman Islands law allows a dissenting shareholder
to express the shareholder’s view that a court-sanctioned reorganization (by way of a scheme of arrangement) of a Cayman Islands
company would not provide fair value for the shareholder’s shares, Cayman Islands statutory law does not specifically provide for
shareholder appraisal rights in connection with a court sanctioned reorganization (by way of a scheme of arrangement). This may make it
more difficult for you to assess the value of any consideration you may receive in a merger or consolidation or to require that the acquirer
gives you additional consideration if you believe the consideration offered is insufficient. However, Cayman Islands statutory law provides
a mechanism for a dissenting shareholder in a merger or consolidation to apply to the Grand Court of the Cayman Islands for a determination
of the fair value of the dissenter’s shares if it is not possible for the company and the dissenter to agree on a fair price within
the time limits prescribed.
Shareholders of Cayman Islands exempted companies (such
as us) have no general rights under Cayman Islands law to inspect corporate records and accounts or to obtain copies of lists of shareholders.
Our directors have discretion under our Articles of Association to determine whether or not, and under what conditions, our corporate
records may be inspected by our shareholders, but are not obliged to make them available to our shareholders. This may make it more difficult
for you to obtain information needed to establish any facts necessary for a shareholder motion or to solicit proxies from other shareholders
in connection with a proxy contest.
United States civil liabilities and certain judgments
obtained against us by our shareholders may not be enforceable.
We are a Cayman Islands exempted company and substantially
all of our assets are located outside of the United States. In addition, the majority of our directors and officers are nationals and
residents of countries other than the United States. A substantial portion of the assets of these persons is located outside of the United
States. As a result, it may be difficult to effect service of process within the United States upon these persons. It may also be difficult
to enforce in U.S. courts judgments obtained in U.S. courts based on the civil liability provisions of the U.S. federal securities laws
against us and our officers and directors who are not resident in the United States and the substantial majority of whose assets are located
outside of the United States.
Further, it is unclear if original actions predicated
on civil liabilities based solely upon U.S. federal securities laws are enforceable in courts outside the United States, including in
the Cayman Islands and Brazil. Courts of the Cayman Islands may not, in an original action in the Cayman Islands, recognize or enforce
judgments of U.S. courts predicated upon the civil liability provisions of the securities laws of the United States or any state of the
United States on the grounds that such provisions are penal in nature. Although there is no statutory enforcement in the Cayman Islands
of judgments obtained in the United States, courts of the Cayman Islands will recognize and enforce a foreign judgment of a court of competent
jurisdiction if such judgment is final, for a liquidated sum, provided it is not in respect of taxes or a fine or penalty, is not inconsistent
with a Cayman Islands’ judgment in respect of the same matters, and was not obtained in a manner which is contrary to the public
policy of the Cayman Islands. In addition, a Cayman Islands court may stay proceedings if concurrent proceedings are being brought elsewhere.
Judgments of Brazilian courts to enforce our obligations
with respect to our Class A common shares may be payable only in reais.
Most of our assets are located in Brazil. If proceedings
are brought in the courts of Brazil seeking to enforce our obligations in respect of our Class A common shares, we may not be required
to discharge our obligations in a currency other than the real. Under Brazilian exchange control laws, an obligation in Brazil
to pay amounts denominated in a currency other than the real may only be satisfied in Brazilian currency at the exchange rate,
as determined by the Central Bank, in effect on the date the judgment is obtained, and such amounts are then adjusted to reflect exchange
rate variations through the effective payment date. The then-prevailing exchange rate may not afford non-Brazilian investors with full
compensation for any claim arising out of or related to our obligations under the Class A common shares.
Our Class A common shares may not be a suitable investment
for all investors, as an investment in our Class A common shares presents risks and the possibility of financial losses.
The investment in our Class A common shares is subject
to risks. Investors who wish to invest in our Class A common shares are thus subject to asset losses, including loss of the entire value
of their investment, as well as other risks, including those related to our Class A common shares, us, the sector in which we operate,
our shareholders and the general macroeconomic environment in Brazil, among other risks.
Each potential investor in our Class A common shares
must therefore determine the suitability of that investment in light of its own circumstances. In particular, each potential investor
should:
| · | have sufficient knowledge and experience to make a meaningful evaluation of our Class A common shares, the merits and risks of investing
in our Class A common shares and the information contained in this annual report; |
| · | have access to, and knowledge of, appropriate analytical tools to evaluate, in the context of its particular financial situation,
an investment in our Class A common shares and the impact our Class A common shares will have on its overall investment portfolio; |
| · | have sufficient financial resources and liquidity to bear all of the risks of an investment in our Class A common shares; |
| · | understand thoroughly the terms of our Class A common shares and be familiar with the behavior of any relevant indices and financial
markets; and |
| · | be able to evaluate (either alone or with the help of a financial adviser) possible scenarios for economic, interest rate and other
factors that may affect its investment and its ability to bear the applicable risks. |
There can be no assurance that we will not be a passive
foreign investment company, or PFIC, for any taxable year, which could subject United States investors in our Class A common shares to
significant adverse U.S. federal income tax consequences.
Under the Internal Revenue Code of 1986, as amended (the
“Code”), we will be a PFIC for any taxable year in which, after the application of certain look-through rules with respect
to subsidiaries, either (i) 75% or more of our gross income consists of “passive income,” or (ii) 50% or more of the average
quarterly value of our assets consists of assets that produce, or are held for the production of, “passive income.” Passive
income generally includes dividends, interest, certain non-active rents and royalties, and capital gains. Cash is generally a passive
asset for these purposes. Goodwill is an active asset to the extent attributable to activities that produce active income.
Based on the composition of our income and assets and
the value of our assets, including goodwill (the implied value of which we estimate based on the price of our Class A common shares),
we believe that we were not a PFIC for the taxable year of 2022. However, because we hold a substantial amount of cash (relative to the
assets shown on our balance sheet) and because our PFIC status for any taxable year will depend on the composition of our income and assets
and the value of our assets from time to time (which may be determined, in part, by reference to the market price of our Class A common
shares, which could be volatile), there can be no assurance that we will not be a PFIC for any taxable year. If our Class A common share
price declines while we continue to hold a substantial amount of cash for any taxable year, our risk of being or becoming a PFIC will
increase. In addition, as we continue to expand our business through acquisitions and organically, our risk of becoming a PFIC will increase
if we engage in activities that generate substantial passive income. Moreover, the extent to which our goodwill will be treated as an
active asset is not entirely clear. If we are a PFIC for any taxable year during which a U.S. investor holds Class A common shares, we
generally will continue to be treated as a PFIC with respect to that U.S. investor for all succeeding years during which the U.S. investor
holds Class A common shares, even if we ceased to meet the threshold requirement for PFIC status. Such a U.S. investor may be subject
to certain adverse U.S. federal income tax consequences. See “Item 10. Additional Information—10.E. Taxation—U.S. Federal
Income Tax Considerations—Passive Foreign Investment Company Rules.”
ITEM 4. INFORMATION ON THE COMPANY
A. History and Development
of the Company
Afya Limited is a publicly held company listed on the
Nasdaq since July 2019, and therefore subject to certain reporting requirements of the Exchange Act.
We were incorporated on March 22, 2019 as a Cayman Islands
exempted company with limited liability duly registered with the Cayman Islands Registrar of Companies. Our corporate purposes are unrestricted
and we have the authority to carry out any object not prohibited by law as provided by Section 7(4) of the Companies Act (As Revised)
of the Cayman Islands, or the Companies Act.
Our affairs are governed principally by (i) our
Amended and Restated Memorandum and Articles of Association; (ii) the Companies Act; and (iii) the common law of the Cayman
Islands. As provided in our Amended and Restated Memorandum and Articles of Association, subject to Cayman Islands law, we have full capacity
to carry on or undertake any business or activity, do any act or enter into any transaction, and, for such purposes, full rights, powers
and privileges. Our registered office is c/o Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman
Islands.
The SEC maintains an internet site (http://www.sec.gov)
that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC.
Our internet address is https://ir.afya.com.br/.
Our History
We founded Afya Brazil with the goal of revolutionizing
medical education in Brazil by providing a more effective, individualized and intuitive learning experience. In order to achieve that,
we have assembled institutions that collectively will help us fulfill our mission. The combination of Afya Brazil, one of the largest
Brazilian medical education groups, and Medcel, one of the leaders in residency exams preparatory courses, was the first step toward achieving
our goal.
Afya benefits from over 20 years of medical education
experience through Afya Brazil and Medcel, both of which were founded and managed by physicians, with a focus on academic excellence and
deep roots in technology and innovation.
We were founded in 1999 with the opening of our first
medical school, Centro Universitário ITPAC, by the Esteves Family, a family of medical professionals with a passion for medical
education. Since its inception, our focus has been medical and related health courses. As of December 31, 2022, 18,104 physicians had
graduated with us since the founding of our predecessor companies. Over the last decade, Afya Brazil grew into a large medical education
group, with several campuses and as of December 31, 2022, had 58,200 undergrad students, of which 35,935 were health-related students
and 22,265 were non-health related students.
Medcel, which was incorporated into Afya Brazil in 2019,
was founded by Dr. Atilio Barbosa in 2004, a pioneer in online medical preparatory courses. In 2007, Medcel launched a proprietary platform
to broadcast online classes. Over the years, Medcel evolved from its online platform into an adaptive digital learning environment where
students can access digital media, watch medical case studies, listen to podcasts and answer personalized quizzes. Finally, in 2018, Medcel
began offering its high-quality tech-enabled content in different formats and to other academic institutions. As of December 31, 2022,
Medcel had 14,569 enrolled students and provided residency preparatory courses to 16 partner institutions, as part of our B2B distribution
network.
In 2016, the private equity group Crescera Investimentos
(formerly Bozano Investimentos) joined forces with Afya Brazil and Medcel, laying out the foundations for the creation of the largest
medical education group in Brazil. See “—BR Health Investment in Afya Brazil” below. Crescera has since sold its interest
in Afya to Bertelsmann. See “— Acquisition of Crescera Shares by Bertelsmann” below.
The industry expertise of the founders of Afya Brazil
and Medcel combined with the governance and financial support of Crescera Investimentos allowed the group to dive deeper into its mission
as a thematic educational service provider focused on the lifelong learning career of physicians in Brazil. We achieve this through the
production and distribution of high-quality content through technology.
In order to achieve our goals, we have laid the foundations
of Afya focusing on a four-step process:
Management Professionalization
Our highly skilled and experienced management team has
extensive experience in the education industry and were hired from some of the best health, education and technology institutions in Brazil.
Our management team is part of a company-wide strategy to attract and retain the best talent. Our CEO, Virgilio Deloy Capobianco Gibbon,
has over 14 years of experience in education. Our CFO, Luis André Blanco, has over 13 years of experience as CFO, and Lélio de Souza Junior, our Vice President of Innovation
& Digital Services, has more than 23 years of experience in tech companies.
Integration of Processes & Services
In order to create synergies, we have developed several
initiatives to improve operational efficiency and to integrate processes across all our campuses and operations. Our high standard Shared
Services Center and Integrated Systems (ERP + Academic System + Learning Management System) went live in October 2017. These initiatives
will help us grow our student base and keep our marginal costs low.
In 2017, we began to roll out the integration of the
educational curriculum throughout all medical school units. This rollout begins with the new entrants curriculum and will be fully completed
as the course matures its students. Accordingly, we have been streamlining the teaching methodology and quality across our undergraduate
medical courses. Since the second half of 2019, all undergraduate medical students have access to our fully integrated Educational Curriculum.
Continuing Innovation
We take a blended approach to our methodology, integrating
in-person teaching with online tools and features. By integrating face-to-face and online features through data collection and analysis,
we are able to individualize the student experience at all times. Through seven key initiatives, we create a 100% student-centric ecosystem.
These initiatives include: Medical content mapping, proprietary methodological assembly, significant learning experiences, comprehensive
adaptive learning, daily learning process evaluation, and practical learning and knowledge.
Organic Growth and Entry into Adjacent Markets
In 2018, the MEC awarded new licenses to Afya Brazil,
allowing it, subject to the verification by the MEC of the satisfactory implementation by Afya Brazil of all regulatory requirements,
to operate seven new medical schools through the “Mais Médicos” program, with an aggregate amount of 350 new
medical school seats per year. As of December 31, 2022, six of these campuses are already operating, as described below. We expect an
additional campus to start operations in 2023.
On May 9, 2019, we consummated the acquisition of IPEMED,
marking our entry into the medical graduate and specialization segment. IPEMED is a leading medical graduate school founded over 13 years
ago, with over 2,300 students across eleven different campuses.
On October 2, 2020, we announced that the Secretary of
Regulation and Supervision of Higher Education of the MEC granted authorization to Afya to operate the undergraduate medicine course in
Santa Inês in the State of Maranhão, under the Mais Médicos II program. This medical school is the first authorized
in connection with the “Mais Médicos” program for Afya and will contribute 50 seats to our operating seats base.
Santa Inês is one of the seven undergraduate campuses Afya was awarded in 2018 in connection with the “Mais Médicos”
program, the largest number awarded to any education group. As of December 31, 2022, the campus is operational.
On December 30, 2020, the Secretary of Regulation and
Supervision of Higher Education of the MEC granted the authorization to Afya operate the undergraduate medicine course in Cruzeiro do
Sul in the State of Acre, under Mais Médicos II program. This medical school is the second authorized school in connection
with the “Mais Médicos” program for Afya and will contribute 50 seats to our operating seats base. Cruzeiro
do Sul is one of the seven undergraduate campuses Afya was awarded in 2018 in connection with the “Mais Médicos”
program, the largest number awarded to any education group.
On February 23, 2022, we announced that the Secretary
of Regulation and Supervision of Higher Education of the Ministry of Education (“MEC”) authorized the operations of the medical
schools in Abaetutuba, in the State of Pará, and Itacoatiara, in the State of Amazonas, both under the Mais Médicos II
program. With the authorizations, Afya reaches its third and fourth authorized schools to start operating under the Mais Medicos II
program. Each medical school will contribute with 50 seats. As of December 31, 2022, the campuses are operational.
On March 16, 2022, the Secretary of Regulation and Supervision
of Higher Education of MEC authorized the operation of medical schools in Bragança, in the State of Pará, and Manacapuru,
in the State of Amazonas, both under the Mais Médicos II program (our fifth and sixth authorized schools under the Mais
Medicos II program, respectively). Each medical school will contribute with 50 seats. As of
December 31, 2022, the campuses are operational.
On March 18, 2022, the Secretary of Regulation and Supervision
of Higher Education of MEC authorized 28 seats additional at Centro Universitário São Lucas in Ji-Parana State of Rondônia.
With this authorization, we reach 2,759 approved seats. The earn-out related to the seats approval is R$800,000 per seat, adjusted by
the CDI rate from the closing until the payment date, of which 50% was paid in April 2022 and the remaining amount is payable in cash
in two equal installments through 2024.
On December 29, 2022, Afya announced that MEC authorized
the increase of 64 medical seats of Faculdade Santo Agostinho, in the city of Itabuna, located in the state of Bahia. No additional commitment
is required regarding this authorization.
The acquisitions of PEBMED, MedPhone, iClinic, Medicinae,
Medical Harbour, Cliquefarma, Shosp, RX PRO, Além da Medicina, Cardiopapers and Glic marked our evolution in the digital health
services sector, complementing our end-to-end offering to healthcare professionals. For more information on PEBMED, MedPhone, iClinic,
Medicinae, Medical Harbour, Cliquefarma, Shosp, RX PRO, Além da Medicina, Cardiopapers and Glic, see “—B. Business
Overview.”
BR Health Investment in Afya Brazil
In 2016, BR Health (which merged into Afya Brazil on
March 29, 2019) acquired a 30% interest in the share capital of Afya Brazil from certain members of the Esteves Family (which has since
increased to 41.5% following share capital increases and the subscription of new shares by BR Health). The acquisition was secured by
the following guarantees by certain members of the Esteves Family (and/or companies controlled by them at the time) in favor of BR Health
with respect to certain indemnification obligations of certain members of the Esteves Family members: (i) a fiduciary assignment
of 70% of certain educational services credit rights of IESVAP up to August 2022, (ii) a pledge of shares pursuant to which Nicolau
Carvalho Esteves pledged 308,998 common shares owned by him in Afya Brazil, and Rosângela de Oliveira Tavares Esteves pledged 92,859
common shares owned by her in Afya Brazil, valid up to April 2024 and which can be partially released on certain dates subject to certain
conditions being met, and (iii) mortgages (hipotecas) over land located in Araguaína and Porto Nacional in the State
of Tocantins. Certain of the guarantees were amended in 2018 to cover certain Esteves Family indemnification obligations in connection
with the IPTAN and IESVAP transactions.
On March 28, 2019, prior to the merger of BR Health into
Afya Brazil, BR Health assigned the guarantees described above to Crescera, and Crescera and certain members of the Esteves Family renegotiated
the guarantees, which are composed of: (i) a pledge of shares pursuant to which Rosângela de Oliveira Tavares Esteves pledged
2,497,275 shares owned by her in Univaço Patrimonial Ltda., (ii) mortgages (hipotecas) over land located in Araguaína
and Porto Nacional in the State of Tocantins, and (iii) a fiduciary assignment of land located in Parnaíba, in the State of
Piauí, and in Palmas, in the State of Tocantins.
Our Pre-IPO Corporate Reorganization
Prior to the consummation of our initial public offering,
certain members of the Esteves Family, Crescera, other members of the Esteves Family and the other shareholders of Afya Brazil, or the
Afya Brazil Minority Shareholder Group, contributed all of their shares in Afya Brazil to us. In return for this contribution, we issued
58,485,140 new Class B common shares to Nicolau Carvalho Esteves, Rosângela de Oliveira Tavares Esteves and Crescera and 17,370,248
new Class A common shares to the other members of the Esteves Family and the Afya Brazil Minority Shareholder Group, in each case in a
one-to-28 exchange for the shares of Afya Brazil contributed to us.
On March 29, 2019, BR Health (a wholly-owned subsidiary
of Crescera that controlled Guardaya), and Guardaya (which owns 100% of Medcel and CBB Web) merged into Afya Brazil, resulting in the
transfer to Afya Brazil of 100% of Medcel and CBB Web and 15% of UEPC, a medical school located in the Federal District.
Additionally, on June 18, 2019, Afya Brazil acquired
an additional 15% interest in UEPC through a contribution by Crescera of its additional 15% interest in UEPC into Afya Brazil’s
share capital. The purchase price was R$24.5 million. This contribution was conducted as part of our corporate reorganization and pursuant
to the terms and conditions of (i) a purchase agreement between BR Health and UEPC’s controlling shareholders, which was assigned
by BR Health to Crescera on March 25, 2019, and which required Crescera to acquire the 15% interest in UEPC directly from UEPC’s controlling shareholders, and (ii) an
investment agreement dated March 29, 2019, among Crescera, certain members of the Esteves Family, certain minority shareholders and Afya
Brazil, pursuant to which Crescera agreed to subsequently contribute its additional 15% interest in UEPC into Afya Brazil’s share
capital in exchange for a certain number of shares in Afya Brazil, to be calculated at the time of the contribution in accordance with
the calculation formula set forth in the investment agreement.
Roll-up transactions
On June 14, 2019, we concluded the roll-up of the minority
shareholders of FASA to Afya Brazil. On June 16, 2019, we concluded the roll-up of the minority shareholders of IESP to Afya Brazil. On
June 17, 2019, we concluded the roll-up of the minority shareholders of UNIVAÇO to Afya Brazil. See “Item 4. Information
of the Company—C. Organizational Structure—” for our current corporate structure.
Pre-IPO and Post-IPO Acquisitions
Please see “—Business Overview—Our
Recent Acquisitions”
Initial Public Offering and Equity Follow-on Offering
In July 2019, we completed our initial public offering,
in which we sold an aggregate of 15,805,841 of our Class A common shares at a public offering price of US$19.00 per common share. We received
approximately US$242.7 million of net proceeds from our initial public offering (i.e., after deducting underwriting discounts, commissions
and offering expenses). Our shares began trading on the Nasdaq Global Select Market on July 19, 2019, under the symbol “AFYA.”
In February 2020, we completed an equity follow-on offering,
in which we sold an aggregate of 3,260,480 of our Class A common shares at a public offering price of US$27.50 per common share. We received
approximately US$86.6 million of net proceeds from our follow-on offering (i.e., after deducting underwriting discounts, commissions and
offering expenses).
SoftBank Investment
On April 26, 2021, we announced that the SoftBank Latin
America Fund, or SoftBank, agreed to purchase R$822 million, equivalent to US$150 million, of Afya’s Series A perpetual convertible
preferred shares, subject to customary closing conditions. In addition, Crescera Educacional II Fundo de Investimento em Participações
Multiestratégia and the Esteves Family agreed to sell 2,270,208 Class A common shares to SoftBank. In connection with such sale,
at the time, Paulo Passoni from SoftBank was appointed as a board member of Afya, being replaced by Maria Tereza Azevedo in 2022.
The key terms of the Series A perpetual convertible preferred
shares, as set forth under the relevant certificate of designations, are: (i) 6.5% per annum cumulative dividend payable quarterly and
in Brazilian reais (payable in U.S. dollars in Brazilian reais equivalent); (ii) SoftBank shall have the right at any time,
to convert its Series A perpetual convertible preferred shares into 5,917,888 common shares, at an initial conversion price established
at US$25.35; (iii) SoftBank shall have the right to redeem any time after the 5th year anniversary at 105% premium; and (iv)
Afya will have the right to force conversion after the 3rd year anniversary if forced conversion trigger conditions are satisfied.
For further information, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Indebtedness—Series
A Perpetual Convertible Shares” and note 13.2.1(d) to our audited consolidated financial statements included elsewhere in this annual
report.
As of December 31, 2022, SoftBank and its affiliates
would beneficially own approximately 6.6% of the total shares of the Company (on an as-converted basis for the Series A perpetual convertible
preferred shares).
Acquisition of Crescera Shares by Bertelsmann
On June 7, 2021, we announced that an affiliate of Bertelsmann
acquired the entirety of the 23,074,134 Class B Afya’s common shares held by Crescera Educacional II Fundo de Investimento em Participações
Multiestrategia, or “Crescera Educacional,” pursuant to a provision in Afya’s amended and restated memorandum and articles
of association then in effect and the shareholders agreement between the Esteves Family and Crescera Educacional, which granted Bertelsmann the right to acquire Crescera Educacional’s
Class B common shares and become a party to the shareholders’ agreement.
Bertelsmann is a media, services and education company
that operates in about 50 countries around the world. It includes the entertainment group RTL Group, the trade book publisher Penguin
Random House, the music company BMG, the service provider Arvato, the Bertelsmann Printing Group, the Bertelsmann Education Group and
Bertelsmann Investments, an international network of funds. Since Afya’s inception, Bertelsmann has indirectly held a stake in Afya
through its investment in Crescera Educacional. In addition, Bertelsmann had Daulins Emilio, the Managing Director at Bertelsmann Brazil
Investments (BBI) and Head of the Bertelsmann Corporate Center in Brazil, as a member of Afya’s board of directors since 2019. In
connection with such transaction, Bertelsmann appointed Kay Krafft and Shobhna Mohn as members of Afya’s board of directors.
Acquisition of our Corporate Control by Bertelsmann
On May 4, 2022, we announced the closing of the transaction
whereby Bertelsmann acquired 6,000,000 of our Class B common shares from the Esteves Family, at a purchase price of US$26.90 per share.
As a result of the closing of the transaction, Bertelsmann came to beneficially own approximately a 57.5% voting interest in Afya. We
further announced that we entered into a new CEO executive employment agreement with Virgilio Gibbon, extending its period through May
2027. The extension was made in connection with the increase of Bertelsmann’s stake in Afya to continue to execute the expansion
in the medical education business and the deployment of the Afya Digital Health strategy.
B. Business Overview
We are the leading medical education group in Brazil
based on number of private medical school seats, according to a MEC report as of December 31, 2022, delivering an end-to-end physician-centric
ecosystem that serves and empowers students to be lifelong medical learners from the moment they join us as medical students through their
medical residency preparation, graduation program, medical post-graduate specialization programs and continuing medical education activities,
or CME, including through digital health services.
Our innovative methodological approach combines integrated
content, interactive learning, and an adaptive experience for lifelong medical learners. Through our educational content and technology-enabled
activities, we focus on effective, personalized learning that mirrors one-on-one tutoring.
We have the largest medical education footprint in Brazil.
Our undergraduate and graduate campuses are spread across 13 Brazilian states, and our digital medical platform is available across Brazil.
As of December 31, 2022, our network of 45 undergraduate and graduate medical school campuses consisted of 32 undergrad operating units
(units that have been approved by MEC and that have commenced operations) and six approved units (units that have been approved by MEC
but that have not yet commenced operations), compared to 30 and 25 operating units as of December 31, 2021 and as of December 31, 2020,
respectively. As of December 31, 2022, our network of 2,823 medical school seats consisted of 2,773 operating seats (seats that have been
approved by MEC and that have commenced operations) and 50 approved seats (seats that have been approved by MEC but that have not yet
commenced operations), compared to 2,481 and 1,893 operating seats as of December 31, 2021 and as of December 31, 2020, respectively.
We plan to expand our network by opening, subject to the verification by the MEC of the satisfactory implementation by Afya Brazil of
all regulatory requirements, the seven approved medical school campuses we were awarded in connection with the “Mais Médicos”
program (the Brazilian federal government initiative to reduce shortages of doctors in the most underserved and vulnerable regions of
Brazil) by December 31, 2022, taking our total to 30 operating medical school campuses in 13 Brazilian states and approximately 2,773
available medical school seats per year.
Following our acquisition of Medcel in the first quarter
of 2019 and IPEMED in the second quarter of 2019, we also offer residency preparatory courses and medical postgraduate specialization
programs, delivering printed and digital content, an online medical education platform and practical medical training.
The acquisition of PEBMED, MedPhone, iClinic, Medicinae,
Medical Harbour, Cliquefarma, Shosp, RX PRO, Além da Medicina, Cardiopapers and Glic marked our evolution in the digital health
services sector, complementing our end-to-end offering to healthcare professionals.
Through PEBMED, we acquired three different products:
(i) Whitebook, a mobile and web application that assists doctors and medical professionals in clinical daily decision-making; (ii) Nursebook,
a mobile application that assists nurses in clinical decision-making; (iii) Portal PEBMED, a website that offers free content, including
opinions, papers and updates in connection with medical news and scientific publications. PEBMED has more than 200,000 monthly active
users on the Whitebook platform and approximately 1.3 million monthly active users to Portal PEBMED. The acquisition expanded our products
and services offerings and offers significant cross-sell and upsell opportunities.
iClinic is a SaaS
model physician focused technology company and one of the leading medical practice management software in Brazil. They seek to empower
doctors to be more independent and have more control over their careers by digitalizing their daily routine, so they can increase their
productivity and deliver better healthcare services. Their portfolio includes: (i) Electronic Medical Record: the first electronic
medical record as a SaaS model in Brazil focused on the physician experience; (ii) Clinical Management System: with this software
doctors can schedule patients online, organize their financial records, use marketing tools to promote their clinics and others; (iii) Telemedicine:
a platform to provide online consultations fully integrated with doctor’s schedule and records; and (iv) Physicians Marketplace:
a website that connects doctors and patients to schedule consultations. As of December 31, 2022,
the software had almost 23,000 users. The platform is currently used for almost 21 million medical consultations per year, of which around
115,000 were through telemedicine and prescribed more than 6,000,000 electronic medical prescriptions.
Medicinae is a healthcare technology company specializing
in healthcare payments and financial services. It offers a financial platform that allows healthcare professionals to manage receivables
in an efficient and scalable way using FIDC (receivables investment fund). We believe Medicinae relieves a number of challenges in the
healthcare payments industry, by reducing long payment cycles for professionals and consolidating financial information, improving the
consumer financial experience.
Medical Harbour offers educational health and medical
imaging solutions through an interactive platform for anatomical study, 3D virtual dissection and analysis of medical images, which allow
the exploration, and knowledge of human anatomy with digital resources: (i) educational health solutions: Athena Hub specialized
in anatomy was created to support dynamic teaching and allow physicians, teachers and students to interact and manipulate a real human
body on a digital platform. Considering the high prices, restriction policies and difficulty on maintaining a human body for anatomy classes,
Athena Hub allows students to interact with a digital human body instead of the aged and degenerate bodies for educational purposes. The
solution count with virtual body, anatomy modules, and real exam analysis with photorealistic rendering. And (ii) medical imaging
solutions: Athena DICOM and MH Cloud specialized in medical imaging with a range of products that simplifies radiology and teleradiology.
Allow physicians to visualize, manipulate, share and store medical imaging with the certification of ANVISA (Brazilian Health Agency).
Cliquefarma is a healthtech company operating a free-to-use
website that tracks prescription drugs, cosmetics and personal hygiene product prices in Brazil. Users of Cliquefarma can search for medications
or healthcare products and compare prices from over 5,600 pharmacies in Brazil. The traffic generated is monetized through a cost-per-click
model, where drugstores pay for each click on their ads, and a cost-per-acquisition model, where drugstores pay for each concluded sale.
In 2022, Cliquefarma generated traffic of 21.2 million visitors.
Shosp is a clinical management software that offers all
functionalities needed for clinics all over Brazil to manage their financials, patients’ appointments, medical records, marketing,
and others. The acquisition of Shosp reinforces the digital prescription digital pillar and creates synergies with iClinic and Medicinae
solutions.
RX PRO is a Digital Platform that connects physicians
with the pharmaceutical industry, providing specialized and personalized marketing for those companies, in a more convenient way for physicians.
RX PRO has already delivered free samples to more than 58,000 physicians with an innovative digital experience, with a Net Promoter Score,
or NPS, of 82.4 and as of today has more than 19 pharmaceutical companies using its platform. RX PRO is monetized by providing a B2B subscription
service to the pharmaceutical industry.
Além da Medicina is an online medical content
platform for physicians and medical students that provides educational tools and technical medical content to assist them throughout their
careers. Its robust content includes mentoring for residency, soft skills, finance, accounting, and investment basics for physicians.
Além da Medicina had more than 9,000 subscribers as of December 31, 2022, and more than 120,000 followers on Instagram.
Cardiopapers is the main medical content and education
platform in the Cardiology field, offering courses and books developed by physicians and for physicians, covering all phases of the medical
career, aligned with Afya’s overall business strategy. Cardiopapers had 8,046 students in 2022 and almost 260,000 followers on Instagram.
The platform includes more than ten courses, such as a cardiology specialist degree preparatory course, cardiological emergencies course,
preoperative course, dyslipidemia course, electrocardiogram (EKG) course and diabetes course, exploring the cardiologic medical field
and also expanding to other medical areas.
Glic is a free diabetes care and management app solution
for physicians and patients that uses technology to improve diabetes education and daily routine practices, connecting users, devices
and healthcare providers.
In addition to health sciences courses, which comprise
medicine, dentistry, nursing, radiology, psychology, pharmacy, physical education, physiotherapy, nutrition and biomedicine, we also offer
degree programs and courses in other subjects and disciplines across several of our campuses, including undergraduate and postgraduate
courses in business administration, accounting, law, civil engineering, industrial engineering and pedagogy. These non-health courses
are not part of our core business, although the number of non-health sciences courses we offer has increased as a consequence of our strategic
acquisitions in 2020, 2019 and 2018 of multi-disciplinary schools with strong health sciences programs, which are our principal focus.
Although non-health courses are not part of our growth strategy, we expect to continue to offer them to the extent they generate local
demand. Following our acquisition of Medcel in the first quarter of 2019 and IPEMED in the second quarter of 2019, we also offer residency
preparatory courses and medical post-graduate specialization programs, delivering printed and digital content, an online medical education
platform and practical medical training.
As of December 31, 2022, we had 58,200 enrolled students,
compared to 61,118 enrolled students as of December 31, 2021, representing a decrease of 4.8% for 2022, and 36,206 enrolled students as
of December 31, 2020, representing an increase of 68.8% for 2021, primarily as a result of our acquisitions in the year ended December
31, 2021. See “Item 4. Information on the Company—B. Business Overview—Our Recent Acquisitions.”
Our business model is characterized by high revenue visibility
and operating leverage. Approximately 90% of our historical revenue for the years ended December 31, 2022, 2021 and 2020 was composed
of the monthly tuition fees we charge students enrolled in our undergraduate and graduate courses.
Our ability to execute our business model and strategy,
primarily through our (i) acquisitions (which represented approximately 48% of our total growth in terms of revenue in 2022, 80.5% of
our total growth in terms of revenue in 2021 and 54.0% of our total growth in terms of revenue in 2020) and (ii) organic growth (which
represented approximately 52% of our total growth in terms of revenue in 2022, 19.5% of our total growth in terms of revenue in 2021,
and 46.0% of our total growth in terms of revenue in 2020), has led to growth, profitability and cash generation:
| · | Our revenue totaled R$2,329.1 million, R$1,719.4 million and R$1,201.2 million in the years ended December 31, 2022, 2021 and 2020,
respectively, representing a compound annual growth rate, or CAGR, of 38.95% since 2020; |
| · | Medical school’s tuition fees represented 77.1%, 75.9% and 73.7% of our historical undergraduate programs combined tuition fees
in 2022, 2021 and 2020, respectively. The average monthly ticket for medical school tuition fees was R$9,400 for the year ended December
31, 2022, which represented an increase of 9.1% from R$8,615 for year ended December 31, 2021, which, in turn, represented an increase
of 6.8% from R$8,065 for year ended December 31, 2020; |
| · | Residency preparatory course, continuing medical education, medical post graduate specialization programs offerings and digital services
totaled R$298.8 million, R$224.9 million and R$200.3 million in revenue for the years ended December 31, 2022, 2021 and 2020, respectively; |
| · | We generated net income of R$392.6 million, R$242.3 million and R$308.0 million in the years ended December 31, 2022, 2021 and 2020,
respectively, representing a CAGR of 12.9% since 2020; |
| · | Our Adjusted EBITDA totaled R$962.1 million, R$754.9 million and R$563.1 million in the years ended December 31, 2022, 2021 and 2020,
respectively, representing a CAGR of 30.7% since 2020; |
| · | Our Operating Cash Conversion Ratio was 94.4%, 100.8% and 75.7% for the years ended December 31, 2022, 2021 and 2020, respectively. |
Quality is a cornerstone of our value proposition. As
of December 31, 2022, our average General Course Index score, which is measured and published by MEC, and is based on certain institutional
planning and development, academic, and management criteria, was 3.32 on a scale of 1 to 5, compared to the Brazilian average of 3.13.
In 2018, we were also awarded seven new undergraduate
campuses in connection with the “Mais Médicos” program, the largest number awarded to any education group, with
a total of 350 new medical school seats.
In 2022, the successful opening of four Mais Médicos
campuses—Abaetetuba, Bragança, Itacoatiara, and Manacapuru—added 200 new medical seats to our portfolio. As of the
date of this annual report, six of these campuses are already in operation. The continued operation of certain of these campuses was subject
to the verification by MEC of the satisfactory implementation by Afya Brazil of all regulatory requirements. See “Item 4. Information
on the Company—Business Overview—Our Geographic Presence.”
Our Recent Acquisitions
The entry point to a medical career begins in undergraduate
institutions, so part of our mission is to consolidate this market. Accordingly, expanding our operations through acquisitions has been
a key component of our growth strategy. We have been able to apply our operating business model to our acquisitions, allowing us to add
quality, value and increase profitability.
In addition, we have equipped ourselves through key initiatives
for strategic and relevant acquisitions to our portfolio, including: the creation of a Shared Services Center dedicated to serving our
campuses and running our integration processes, the centralization of content creation and the creation of a dedicated sales team for
each market we operate in.
Our recent acquisitions, which were all made through
Afya Brazil, include:
UniRedentor
On January 31, 2020, we acquired 100% of UniRedentor.
UniRedentor is a post-secondary education institution with governmental authorization to offer on-campus, undergraduate courses in medicine
in the State of Rio de Janeiro. UniRedentor also offers other health-related undergraduate degrees and graduate programs in medicine and
health, as well as other courses.
The aggregate purchase price of R$214.6 million was adjusted
by R$4.5 million and was comprised by: (i) R$114.6 million paid in cash on the acquisition date; and (ii) R$100 million payable in five
equal installments from January 2021 to July 2024, adjusted by the CDI rate. The purchase consideration adjustment of R$4.5 million was
deducted from the first installment paid in January 2021.
The acquisition contributed 112 medical school seats
to us, with a potential 44 additional medical school seats subject to approval by MEC.
UniSL
On May 5, 2020, we 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. The aggregate purchase consideration of R$201.5 million was adjusted by R$7.8 million, of which:
(i) 70% paid in cash on the transaction closing date; and (ii) 30% payable in cash in three equal installments through 2023, adjusted
by the CDI rate. The purchase consideration adjustment of R$7.8 million was deducted from the first installment due in May 2021. The acquisition
contributed 182 medical school seats to us.
In connection with the acquisition there are 72 additional
seats still pending approval that, if approved by MEC, will result in a potential additional payment by us of up to R$57.6 million, as
adjusted by the CDI rate. On March 18, 2022, Afya announced that MEC authorized the increase of 28 seats of Centro Universitário
São Lucas, in Ji-Parana located in the state of Rondônia, resulting in a consideration to be transferred of R$22.4 million,
as adjusted by the CDI rate from the closing until the payment date, of which: (i) 50%
was paid in April 2022, and (ii) 50% is payable in cash in two equal installments through 2024.
PEBMED
On July 20, 2020, we acquired 100% of the total share
capital of PEBMED. PEBMED offers content and clinical tools for healthcare professionals, including mobile and web apps. The original
purchase price of R$132.9 million was adjusted by R$0.03 million and was comprised by: (i) R$115.3 million paid in cash on the acquisition
date; and (ii) R$17.5 million was paid with Afya Brazil’s shares which were subsequently contributed to us in exchange for the issuance
of 141,976 of our shares.
This acquisition will contribute to the development and
expansion of our online services, increasing our monthly active users and bringing active physicians to our digital platform.
FESAR
On November 3,
2020, we acquired 100% of the total share capital of FESAR. FESAR is a post-secondary
education institution with government authorization to offer on-campus, undergraduate courses in medicine in the State of Pará.
The aggregate purchase
price was R$260.8 million, including the CDI rate adjustment from the signing date and the real state of the operation, estimated at R$17.3
million, of which 100% was paid in cash on the closing of the operation. The purchase consideration was adjusted by R$1.5 million
and was paid on February 25, 2021. This acquisition contributed 120 medical school seats to us.
MedPhone
On November 4,
2020, we acquired 100% of the total share capital of MedPhone. The net purchase price was
R$6.4 million, and was paid in cash on the acquisition date. MedPhone is a clinical decision and leaflet consultation app in Brazil, that
helps physicians, medical students and other healthcare professionals to make faster and more accurate decisions on a daily basis.
On September 20, 2022, we completed the merger of MedPhone
with and into Afya Brazil, in order to simplify our corporate structure.
FCMPB
On November 9,
2020, we acquired 100% of the total share capital of FCMPB. FCMPB is a post-secondary education institution with government authorization
to offer on-campus, undergraduate courses in the State of Paraíba.
The total net purchase
price of R$379.9 million was adjusted to R$378.8 million and comprised (i) R$189.9 million paid in cash on the transaction closing date,
and (ii) R$188.9 million payable in cash in four equal installments through 2024, adjusted by the CDI rate. The acquisition contributed
157 medical school seats to us.
iClinic
On January 21, 2021, we acquired 100% of the total share
capital of iClinic. iClinic is a SaaS model physician focused technology company and the leading practice management software in Brazil.
This software empowers doctors to be more independent and have more control over the non-medicine aspect of their practices by digitalizing
their daily routine, so they can increase their productivity and deliver better healthcare. The aggregate purchase price of R$191.1 million
is comprised of: (i) R$119.6 million, or 62.6%, was paid in cash; and (ii) R$71.5 million, or 37.4%, was settled with Afya’s shares
on the transaction closing date.
Medicinae
On March 25, 2021, we acquired 100% of the total share
capital of Medicinae, a leading Brazilian healthcare technology company that specializes in healthcare payments and financial services.
The aggregate purchase price of R$9.2 million is comprised of: (i) R$5.6 million of which 100% was paid in cash on the transaction closing
date; and (ii) an earn-out (“contingent consideration”) of up of R$4.4 million is payable in connection with product development
goals for 2021 and revenue achievements for 2022. The contingent consideration of R$3.6 million was based on the present value of the
obligation considering the facts and circumstances at the acquisition date. There was no contingent consideration balance as of December
31, 2022.
Medical Harbour
On April 8, 2021, we acquired 100% of the total share capital of Medical Harbour,
which offers educational health and medical imaging solutions through an interactive platform for anatomical study, 3D virtual dissection
and analysis of medical images, which allow the exploration, and knowledge of human anatomy with digital resources. The aggregate purchase
price of R$11.3 million is comprised of: (i) R$5.0 million of which 100% was paid in cash on the transaction closing date; and (ii) an
earn-out (“contingent consideration”) of up to R$9.0 million is payable in connection with product development goals for 2021
and 2022 and revenue achievements for 2023. The contingent consideration of R$6.3 million was based on the present value of the obligation
considering the facts and circumstances at the acquisition date. As of December 31, 2022, there was a contingent consideration of R$4.1
million.
Cliquefarma
On April 16, 2021, we acquired 100% of the total share
capital of Cliquefarma, a healthtech company operating a free-to-use website that tracks prescription drugs, cosmetics and personal hygiene
product prices in Brazil. The aggregate purchase price of R$22.1 million is comprised of: (i) R$16.2 million paid in cash; (ii) R$3.0
million settled with Afya’s shares on the transaction closing date; and (iii) an earn-out (“contingent consideration”)
of R$3.0 million is payable in relation to product development. The contingent consideration of R$2.9 million was based on the present
value of the obligation considering the facts and circumstances at the acquisition date.
Shosp
On May 13, 2021, we acquired 100% of the total share
capital of Shosp, a clinical management software that offers all functionalities needed for clinics all over Brazil to manage their financials,
patients appointments, medical records, marketing, and others. Afya’s intention is to reinforce the Digital Services operating segment.
The aggregate purchase price of R$7.9 million is comprised of: (i) R$5.9 million paid in cash; (ii) R$454 thousand in consideration to
be transferred; and (iii) an earn-out (“contingent consideration”) of up to R$1.8 million payable in relation to product development.
The contingent consideration of R$1.6 million was based on the present value of the obligation considering the facts and circumstances
at the acquisition date. As of December 31, 2022, there was a contingent consideration of R$2.2 million.
UNIFIPMoc
On June 1, 2021, we acquired 100% of the total share
capital of UNIFIPMoc. The aggregate purchase price was R$328.3 million paid in cash at date of acquisition. As of December 31, 2022, there
were 40 additional seats still pending approval, which, if approved by MEC, would result in a potential additional payment of up to R$50.0
million. UNIFIPMoc is a post-secondary education institution with governmental authorization to offer on-campus, undergraduate degree
programs in medicine and healthcare, as well as in other courses, in the states of Minas Gerais and Bahia.
Unigranrio
On August 4, 2021, we acquired 100% of the total share
capital of Unigranrio. The original aggregate purchase price was R$626.1 million, which was later adjusted to R$619.0 million as result
of net debt adjustments. R$375.7 million, or 60% of the purchase price, was paid in cash on the closing date, and the remaining R$243.3
million, or 40%, will be paid in four equal annual installments, adjusted by the CDI rate. There are 82 additional seats still pending
approval which, if approved by MEC, will result in a potential additional payment of up to R$90.2 million. Unigranrio is a post-secondary education institution with government authorization
to offer on-campus, undergraduate medical and health-related courses in the state of Rio de Janeiro and Santa Catarina.
Following our acquisition of the Unigranrio entities,
on September 21, 2022, we liquidated and dissolved Sociedade Educacional de Palhoça S/S Ltda., and on January 16, 2023 we completed
the merger of Instituto de Ensino Superior de Palhoça S/S with and into Companhia Nilza Cordeiro Herdy de Eduação
e Cultura, in order to simplify our corporate structure.
RX PRO
On October 1, 2021, we acquired 100% of the total share
capital of RX PRO, a solution that connects physicians with the pharmaceutical industry, providing specialized and personalized marketing
for those companies, in a more convenient way for physicians. RX PRO does this by delivering free samples to a community of pre-selected
physicians and offering medical updates regarding pharmaceutical products and treatments in a fast and efficient way for doctors. RX PRO
incorporates the digital prescription pillar and further strengthens Afya’s digital ecosystem thesis. The aggregate purchase price
paid to sellers was R$45.6 million, of which R$30.3 million was paid in cash and R$5.1 million paid in Afya stock. An earn-out of up to
R$21 million can be paid related to gross revenue achievements for 2022, 2023 and 2024. The contingent consideration of R$10.2 million
was based on the present value of the obligation considering the facts and circumstances at the acquisition date. As of December 31, 2022,
there was a contingent consideration of R$1.8 million.
Garanhuns
On November 5, 2021, the Secretary of Regulation and
Supervision of the MEC authorized the operation of a medical school in Garanhuns in the State of Pernambuco. This authorization is in
connection with a previous request made by ITPAC, a subsidiary of Afya Brazil, to expand their operation and open a branch in the city
of Garanhuns, before the consolidation of Afya. As a result, we acquired 100% of Garanhuns. The purchase price is to be paid as follows:
(i) R$54.0 million in cash on the closing date of the transaction; and (ii) R$54.0 million in two equal installments, adjusted by the
CDI rate, and due annually at the end of the first and the second anniversary of the closing date of the transaction.
Além da Medicina
On March 4, 2022, we acquired 100% of the total share
capital of Além da Medicina. This business combination incorporates new capabilities to the content & technology for the medical
education pillar and further strengthens Afya’s digital ecosystem. The aggregate purchase price of R$26.8 million is comprised of:
(i) R$14.9 million paid in cash on the transaction closing date; (ii) an earn-out (“contingent consideration”) of up of R$
19.2 million is payable in connection with revenue target achievements for 2023 and 2024; and (iii) a price adjustment related to net
debt of R$0.8 million in favor of selling shareholders. The contingent consideration of R$11.1 million was based on the present value
of the obligation considering the facts and circumstances at the acquisition date. As of December 31, 2022, there was a contingent consideration
of R$12.0 million.
Cardiopapers
On April 4, 2022, we announced the closing of the acquisition
of 100% of the total share capital of Cardiopapers. The aggregate purchase price of R$42 million is comprised of: (i) R$34.9 million paid
in cash on the transaction closing date; (ii) an earn-out (“contingent consideration”) of up of R$15 million is payable in
connection with revenue target achievements for 2023 and 2024 and other goals; and (iii) price adjustment related to net debt of R$0.3
million in favor of Afya Brazil. The contingent consideration of R$7.4 million was based on the present value of the obligation considering
the facts and circumstances at the acquisition date. As of December 31, 2022, there was a contingent consideration of R$8.0 million.
Glic
On May 23, 2022, we acquired 100% of the share capital
of Glic. Glic is a free diabetes care and management app solution for physicians and patients that uses technology to improve diabetes
education and daily routine practices, connecting users, devices and healthcare providers. The aggregate purchase price of R$30.6 million
comprised of: (i) R$21.6 million paid in cash on the transaction closing date; and (ii) an earn-out (“contingent consideration”)
of up of R$12.0 million is payable in connection with revenue target achievements for 2023 and 2024 and product development goals. The contingent consideration of R$9.0
million was based on the present value of the obligation considering the facts and circumstances at the acquisition date. As of December
31, 2022, there was a contingent consideration of R$9.5 million.
DelRey
On January 2, 2023, we announced the closing of the acquisition
of 100% of the total share capital of DelRey, which acquisition encompasses the operations of Centro Universitário Tiradentes Alagoas
(“UNIT Alagoas”) and Faculdade Tiradentes Jaboatão dos Guararapes (“FITS Jaboatão dos Guararapes”).
The transaction does not include the “UNIT” and “FITS” brands, which will be licensed to Afya during the first
year of operation. The aggregate purchase price was R$825.0 million, prior to deducting DelRey’s net debt, to be paid as follows:
(i) R$575.0 million in cash on the transaction’s closing date; and (ii) R$250.0 million in three annual installments, respectively,
of R$150.0 million, R$50.0 million and R$50.0 million, as adjusted by the SELIC rate. There is a contingent payment related to 84 additional
seats subject to approval. If the Ministry of Education approves those seats until December 31, 2024, it will result in a potential additional
payment of R$1.25 million per seat in UNIT Alagoas, as adjusted by the IPCA rate between the closing date and the date of its effective
payment.
Our Competitive Strengths
Continuous focus on disrupting traditional medical education
| · | We have an in-depth understanding of medical education and the related issues faced by students in Brazil. As the largest medical
education group in Brazil on a per-seat basis, according to MEC, we are able to identify trends and adapt our services accordingly; |
| · | We have developed a methodological approach to learning that incorporates individualization and technology in both digital and physical
format; |
| · | We currently produce content that is centralized, continuously updated and available to all our institutions and students; |
| · | We have the largest operating infrastructure in medical education in Brazil on a per-seat basis, according to MEC, with more than
662 partner teaching hospitals and clinics and almost 260,710 physicians and specialists in our ecosystem; |
| · | We believe we have developed the first instructional medical web series created globally, and we have completed the first two seasons
and have already begun working on the third season; |
| · | We believe we are the first education group in Brazil to offer a fully digital and customized service for medical residency exam preparation; |
| · | We believe we are the first player to offer supplemental medical education content to third-party institutions through a business-to-business
model; and |
| · | We started offering content and clinical tools for healthcare professionals, including mobile and web apps. |
High-quality standards
Quality is a cornerstone of our value proposition. Our
operating infrastructure and innovative methodological approach has achieved high levels of satisfaction across our medical schools. Through
our digital platforms, we monitor our students’ learning experience using several criteria and variables. According to Educainsights,
our NPS, a widely known survey methodology that measures the willingness of customers to recommend a company’s products and services,
was 41 for medical students that graduated more than five years ago, 27 for medical students that graduated more than two years ago and
less than five years ago, and 38 for medical students that graduated less than two years ago. This gradual improvement in our NPS score
shows our continuing commitment to high-quality education and the medical careers of our students. Additionally, as of December 31, 2022,
our average General Course Index, which is measured and published by MEC, and is based on certain institutional planning and development,
academic and management criteria, was 3.32 on a scale of 1 to 5, compared to the Brazilian average of 3.13. See “Item 4. Information
on the Company—Business Overview—Regulatory Overview—Regulatory Processes of Post-secondary Education Institutions—Accreditation of
Post-secondary Education Institutions and Authorization and Recognition of Programs” for further information on the General Course
Index.
In addition, through our online medical education platform
that offers distance learning residency preparatory courses, we are able to monitor our students’ learning experience using several
criteria and variables, including the educational materials they access and use, frequently asked questions, their study hours and schedule,
and their attendance record. Furthermore, as a result of the quality of the content and methodology and the differentiated services offered
by Medcel, third-party medical schools proactively contact it seeking to adopt Medcel’s medical education content to improve their
medical students’ learning experience and academic scores. As of December 31, 2022, 16 third-party schools had adopted Medcel’s
medical education content compared to approximately six as of December 31, 2020.
The nature of our business model
Attractive financial model: We have a strong combination
of significantly low customer acquisition costs, calculated as the sum of sales and marketing and personnel expenses divided by student
additions, which were approximately R$1,882, R$2,016 and R$2,488 per student as of December 31, 2022, 2021 and 2020, respectively, high
occupancy rates of approximately 100% of medical seats in our medical schools as of December 31, 2022, 2021 and, 2020, and strong operating
cash conversion of 94.4%, 100.8% and 75.7% as of December 31, 2022, 2021 and 2020, respectively. As of December 31, 2022, our Life Time
Value (LTV) was R$425,658, calculated as the sum of R$70,943 gross income per student divided by 17% (to account for one-sixth of the
student base graduating every year). As of December 31, 2021, our Life Time Value (LTV) was R$353,404, calculated as the sum of R$58,901
gross income per student divided by 16.7% (to account for one-sixth of the student base graduating every year). As of December 31, 2020,
our Life Time Value (LTV) was R$286,227, calculated as the sum of R$47,704 gross income per student divided by 16.7% (to account for one-sixth
of the student base graduating every year).
Contracted growth: We have contracted growth visibility
into medical schools that are in the initial six years of operations as a result of the six-year maturation cycle of our medical school
seats. This cycle begins when a medical school becomes operational, with a first year medical school class that progresses through the
required six years as the next classes begin behind it, and ends when the medical school has six school years of medical students and
has therefore reached capacity at maturation (i.e., the maximum number of approved seats). Since the maximum number of medical seats per
medical school is set by regulation, the only way to grow our medical school seats, and thus our numbers of enrollments, is through acquisitions
or starting new medical schools. As of December 31, 2022, we had 2,823 approved medical school seats out of an expected total capacity
of 22,744 medical school enrollments by 2028, which gives us visibility as to the growth potential of our revenues over the period. See
“Item 5. Operating and Financial Review and Prospects—Medical School Regulatory Capacity and Capacity at Maturation.”
End-to-end ecosystem: Successfully integrating
the businesses we invest in or acquire, allows us to offer an end-to-end physician-centric ecosystem. The point of entry of one business
unit is the point of exit from another, which increases cross-selling and upselling opportunities.
Difficult to replicate: We believe the combination
of regulatory barriers, demand and supply imbalance and our end-to-end physician-centric ecosystem are difficult to replicate and that
it would take a significant amount of time for competitors to reach the scale of our operation.
Self-reinforcing network effects of our education
cycle: As we aim to be the trusted content and knowledge partner for lifelong medical learners in Brazil, we have created and have
been nurturing an education cycle that entails differentiation, talented stakeholders and recognition. Our continuous focus on implementing
all stages of our cycle has allowed us to continuously expand our footprint.
Extensive M&A track record
We have extensive capabilities in, and a strong track
record of, identifying, negotiating and successfully integrating acquisitions. We have developed an integration model, operated by a dedicated
team responsible for analyzing, mapping and integrating the systems of our acquired businesses, that we believe enables us to fully integrate
the businesses we acquire in an efficient manner and within 12 months of their acquisition.
Our integration model is composed of four stages:
| · | Stage 1 (Preliminary Analysis): Preliminary analysis of the available infrastructure, organizational structure and teaching model
of the acquired business to identify potential integration issues. |
| · | Stage 2 (Detailed Mapping): Detailed migration diagnosis and mapping of the systems, processes and teaching model of the acquired
business to be integrated into our centralized shared-services center and academic model. |
| · | Stage 3 (Integration/Migration): Centralization and migration of the systems and processes into our shared services center and standardization
of the teaching model of the acquired business. |
| · | Stage 4 (Ongoing Support): Post migration/integration remote and on-site support and monitoring to stabilize the integrated operations
of the acquired business. |
Our consolidated operating history and our recent acquisitions
entail a number of challenges, such as effectively integrating the operations of any acquired companies with our existing business and
managing a growing number of campuses. See “Item 3. Key Information—D. Risk Factors—Certain Risks Relating to Our Business
and Industry—We may not be able to identify and acquire new medical higher education institutions or meet our strategic and financial
goals in connection with any business acquisition we seek, and difficulties in effectively integrating and managing a growing number of
campuses may adversely affect our strategic objectives” and “Item 3. Key Information—D. Risk Factors—Certain Risks
Relating to Our Business and Industry—Our operating history as a consolidated company, our recent acquisitions and the comparability
of our results may make it difficult for investors to evaluate our business, financial condition, results of operations and prospects.”
Purpose driven culture
Medical education requires a core human value: compassion.
As we endeavor to revolutionize medical education in Brazil, we believe that by training and educating better physicians we are helping
people and their communities across Brazil. This mission has united families and entrepreneurs, executives and sponsors with over 20 years
of know-how and expertise in the education sector. Our internal satisfaction survey conducted in 2022 showed employee satisfaction levels
of 84 out of a possible 100, based on several criteria, such as trust in, and a commitment to, our values, leadership satisfaction, work
satisfaction, learning and development, and active participation in our activities, reinforcing our strong commitment to our mission and
purpose.
Our Growth Strategies
We aim to continue to grow organically and through acquisitions
and to generate greater shareholder value by implementing the following strategic initiatives:
Maturation of current number of authorized medical school
seats
We benefit from contracted growth visibility in our medical
schools that are in the initial six years of operations, which we derive from two main sources: (1) the six-year maturation cycle
of our medical school seats, which begins when a medical school becomes operational, with a first year medical school class which progresses
through the required six years as the next classes begin behind it, and which ends when the medical school has six school years of medical
students and has therefore reached capacity at maturation (i.e., the maximum number of approved seats), and (2) new enrollments from
our seven awarded campuses in connection with the “Mais Médicos” program.
Since the maximum number of medical seats per medical
school is set by applicable regulations, the only way to grow our medical school seats, and thus our number of enrollments, is through
acquisitions or starting new medical schools. Assuming full compliance with applicable regulations and that our seven new “Mais
Médicos” campuses mature as expected with 50 medical seats for each campus, we estimate reaching a total medical student
base of 22,744 students by 2028. See “Item 5. Operating and Financial Review and Prospects—Medical School Regulatory Capacity
and Capacity at Maturation” and “Item 3. Key Information—D. Risk Factors—Certain Risks Relating to Our Business
and Industry—The post-secondary education sector is highly regulated, and our failure to comply with existing or future laws and
regulations could significantly impact our business.”
Open new campuses in connection with the “Mais
Médicos” program
In 2018, we were also awarded seven new undergraduate
campuses in connection with the “Mais Médicos” program, the largest number awarded to any education group, with
a total of 350 new medical school seats. The operation of such campuses is subject to the verification by MEC of the satisfactory implementation
by Afya Brazil of all regulatory requirements. As of the date of this annual report, MEC had inspected six of the campuses, and the final
verification was published in: (i) October 2020 for ITPAC Santa Inês; (ii) December 2020 for ITPAC Cruzeiro do Sul; (iii)
February 2022 for ITPAC Abaetetuba; (iv) February 2022 for ITPAC Itacoatiara; (v) March 2022 for ITPAC Bragança; and (vi)
March 2022 for ITPAC Manacapuru.
Expand our medical residency preparation enrollments
base
We expect that competition for medical residencies will
increase as the number of graduating physicians grows and the number of available residency seats remains static. We plan to continue
to grow our medical residency exam preparation student enrollments, leveraging the academic outcome, scalability and learning experience
of our digital platform.
Expand our graduate programs enrollments base
Due to the shortage of medical residency seats and the
growing demand for medical graduate courses, we believe we will be able to expand our current offering in this segment.
We intend to continue developing our business-to-business
strategy by increasing the number of partners and student enrollments through increased marketing and sales effort.
Cross-sell across our existing medical student base
Because our solutions target the lifelong education journey
of medical students, we have identified an opportunity to increase student enrollments at a low marginal cost driven by cross-selling
opportunities, such as increasing the number of former undergraduate students subscribing to our medical residency exam solutions and
the number of former undergraduate and/or medical residency students applying to our graduate and CME courses.
Expand our B2B capabilities
B2B contracts are effective customer entry points to
our products and services. Students are familiar with our platforms, increasing our brand equity and helping us attract more physicians
to enroll in preparatory courses, graduate programs and CME products.
Expand our distribution channels
We plan to continuously expand our distribution network
by increasing our presence in direct and third-party channels, launching graduate courses or CME for third-party continuing medical education
hubs (including, but not limited to, hospitals, clinics and other medical schools) to grow our graduate medical footprint, through partnerships
with such third-party continuing medical education hubs.
Leverage infrastructure and extract synergies from acquisitions
We believe we have been able to successfully integrate
our acquisitions into our ecosystem. We plan to implement several measures to improve the profitability of recent acquisitions, including
but not limited to:
| · | Streamlining fee discounts and scholarship policies; |
| · | Integrating operations with our shared-services center; |
| · | Streamlining faculty training in line with our career plan; and |
| · | Integrating teaching models into our academic model. |
Continue to selectively pursue M&A opportunities
We plan to selectively pursue acquisitions that will
complement our current medical education services offering and/or enhance our product portfolio, such as digital content platforms, continuing
medical education institutions and other medical certification companies, among others. We are currently evaluating possible acquisition
opportunities and submit non-binding proposals from time to time. We believe that we have developed a strong capability and track record
of acquisitions. In 2022 to date, we acquired or invested in three companies. The acquisitions will increase our total number of approved
medical school seats to 3,163 as of the date of this annual report from 2,731 as of December 31, 2021. In 2021, we acquired or invested
in nine companies, which increased our medical school seats by more than 27.4% over the year. In 2020, we acquired or invested in six
companies and agreed to acquire two companies, which increased our medical school seats by more than 36% over the year. Our acquisition
of Medcel enabled us to access the medical residency preparation market, and the acquisition of IPEMED, enabled us to enter the graduate
and specialization courses market. Our acquisition strategy is mainly focused on expanding our medical school footprint by adding new
institutions to our existing portfolio.
Enter into new markets
We believe our end-to-end physician-centric ecosystem
is equipped to serve medical students in complementary segments where our innovative, methodological, data-driven approach can continue
to disrupt traditional vendors and legacy business models. We believe opportunities exist in new sectors and regions of Brazil. In the
future, we intend to focus on expanding further into continuing medical education. We may also seek to grow our business by selectively
expanding into international markets with similar fundamentals.
Develop new products
We plan to continuously evolve our platform and offer
solutions that keep up with the growing demands of our students. We have a planned pipeline of new products, including new medical web-series
seasons, corporate medical training, new extension health programs, a tutoring suite, a peer-to-peer suite and a virtual reality product.
Our Geographic Presence
Our headquarters and most of our shared services operations
are located in Nova Lima, in the State of Minas Gerais. Our content creation and dedicated sales team is located in São Paulo,
in the State of São Paulo.
As of December 31, 2022, our network consisted of a total
of 45 undergraduate and graduate campuses: (i) 32 undergraduate campuses are operating units (units that have been approved by MEC and
that have commenced operations)—30 of which offer a medical course, and one of which that has been approved by MEC but has not yet
commenced operations, and (ii) 13 graduate campuses that offer medicine- and health-related courses.
We plan to expand our network by opening one approved
undergraduate medical school campuses we were awarded in connection with the “Mais Médicos” program by 2023.
As of December 31, 2022, we had 14,569 students enrolled in our online prep-courses spread across Brazil.
The chart and table below illustrate our current footprint
of undergraduate and graduate medical schools.
Campus |
State |
Brand |
Year of Acquisition |
Approved Seats(1) |
Semester(2) |
Porto Nacional |
TO |
ITPAC |
Before 2018 |
120 |
02.04 |
Pato Branco |
PR |
FADEP |
2018 |
50 |
02.17 |
Pato Branco |
PR |
FADEP |
2018 |
60 |
02.19 |
Itajubá |
MG |
FMIT |
2018 |
87 |
01.68 |
Parnaíba |
PI |
IESVAP |
2018 |
80 |
02.15 |
Palmas |
TO |
ITPAC |
2018 |
120 |
02.17 |
Teresina |
PI |
UNINOVAFAPI |
2018 |
110 |
02.04 |
Teresina |
PI |
UNINOVAFAPI |
2018 |
61 |
02.17 |
São João Del Rei |
MG |
UNIPTAN |
2018 |
38 |
02.15 |
São João Del Rei |
MG |
UNIPTAN |
2018 |
11 |
02.16 |
Araguaína |
TO |
UNITPAC |
2018 |
80 |
02.06 |
Ipatinga |
MG |
UNIVAÇO |
2018 |
100 |
01.99 |
Marabá |
PA |
FACIMPA |
2019 |
120 |
02.19 |
Vitória da Conquista |
BA |
FASA |
2019 |
100 |
01.15 |
Itabuna |
BA |
FASA |
2019 |
85 |
02.18 |
Cametá |
PA |
ITPAC - Mais Médicos |
2019 |
50 |
To be started |
Cruzeiro do Sul |
AC |
ITPAC - Mais Médicos |
2019 |
50 |
01.21 |
Santa Inês |
AM |
ITPAC - Mais Médicos |
2019 |
50 |
02.20 |
Manacapuru |
AM |
ITPAC - Mais Médicos |
2019 |
50 |
02.22 |
Itacoatiara |
MA |
ITPAC - Mais Médicos |
2019 |
50 |
02.22 |
Abaetetuba |
PA |
ITPAC - Mais Médicos |
2019 |
50 |
02.22 |
Bragança |
PA |
ITPAC - Mais Médicos |
2019 |
50 |
02.22 |
Itaperuna |
RJ |
Uniredentor |
2019 |
112 |
02.15 |
João Pessoa |
PB |
FCMPB |
2020 |
24 |
02.17 |
João Pessoa |
PB |
FCMPB |
2020 |
33 |
02.18 |
João Pessoa |
PB |
FCMPB |
2020 |
80 |
02.16 |
João Pessoa |
PB |
FCMPB |
2020 |
20 |
02.18 |
Redenção |
PA |
FESAR |
2020 |
120 |
02.18 |
Porto Velho |
RO |
UniSL |
2020 |
52 |
02.19 |
Porto Velho |
RO |
UniSL |
2020 |
130 |
02.05 |
Ji-Paraná |
RO |
UniSL |
2020 |
28 |
02.21 |
Guanambi |
BA |
FIPGuanambi |
2021 |
60 |
02.18 |
Garanhuns |
PE |
ITPAC |
2021 |
120 |
02.21 |
Montes Claros |
MG |
UNIFIPMOC |
2021 |
100 |
02.07 |
Duque de Caxias |
RJ |
UNIGRANRIO |
2021 |
110 |
01.97 |
Duque de Caxias |
RJ |
UNIGRANRIO |
2021 |
88 |
02.17 |
Rio de Janeiro |
RJ |
UNIGRANRIO |
2021 |
110 |
02.04 |
Itabuna |
BA |
FASA |
2023 |
64 |
01.23 |
Unit Alagoas |
AL |
UNIT |
2023 |
100 |
02.14 |
Unit Alagoas |
AL |
UNIT |
2023 |
40 |
02.16 |
Unit Jaboatão |
PE |
UNIT |
2023 |
100 |
01.18 |
Unit Jaboatão |
PE |
UNIT |
2023 |
100 |
01.19 |
| (1) | Number of medical seats presented are estimated. |
| (2) | Schools with six or more years of operations are considered fully matured. |
Industry Overview
Introduction to Brazil’s education environment
Brazil’s education environment has become increasingly
open to private capital. At the same time, the government has continued to play an important role through the municipalities, states,
and federal government.
Post-secondary education
Higher education in Brazil differs significantly from
pre-secondary education. The majority of higher education schools are under private management and account for approximately 88% (both
for profit and nonprofit) of all higher education institutions, according to Sinopse Estatística da Educação Superior.
Higher education institutions are divided into three categories depending on the number of courses they offer, seniority of the teaching
staff, and amount of research they conduct: they can be classified as colleges, university centers or universities. Typical post-secondary
programs take between four to six years to complete. While some courses in these programs only occur during a certain period of the day
(i.e., morning, afternoon, or evening), others are offered as full day courses. Tuition is paid on a monthly basis, primarily out of pocket
by students and their families. Government financing is available, but not easily accessible. The main programs are FIES and PROUNI, which
together accounted for 48% of total financing in 2021 prior to more regulated policies in recent years, according to Sinopse Estatística
da Educação Superior.
Introduction to Brazil’s medical education industry
In Brazil, aspiring physicians apply to medical school
following graduation from secondary education. Medical school in Brazil is a six year undergraduate program. Upon graduation, medical
students gain a license and can start working as a generalist physician. At this point, they usually consider alternatives to gain a certification
for one or more medical specialties.
The first and most common path to obtaining a medical
specialty certification is through a medical residency program. If a candidate chooses the medical residency path, the student must pass
an entrance examination, referred to as R1 exam administered by each institution offering a residency program. After getting approved
by a residency institution, the student then starts the first year of residency with the support of a government study grant throughout
the specialization period. If the physician wants to pursue a sub specialty, he or she will need additional years of study, which may
or may not require incremental entrance tests.
Medical professionals that do not choose or fail to be
admitted into a residency program can still pursue a medical specialty certification through other alternatives. For instance, a generalist
can take the specialist certification exam to become a specialist after meeting a variety of eligibility criteria. Those criteria can
include internships, hours of work under supervision of a medical specialist, or hours of study in a certified graduate program, among
other methods. Depending on the desired level of medical specialty, it can take four to 10 years for a generalist to meet the criteria
and, in this context, graduate programs can be a shorter path to reach eligibility sooner.
As medical science continues to evolve very rapidly,
medical professionals must seek ways to stay up to date on those developments. For that purpose, physicians and other medical professionals
tend to use numerous sources of continuing medical education, or CME, including short term programs, scientific
paper digests, and medical congresses, among others.
Medical education system: Brazil vs. United States
While Brazil mandates that students pursue a six year
specific undergraduate medical education, a student in the United States must typically earn a four year undergraduate degree prior to
applying for medical school. Although no specific undergraduate degree is required, pre medical, biology, and health focused majors are
recommended.
A U.S. student must apply to medical school programs
upon finishing his undergraduate degree, typically taking another four years to complete medical school. As is the case in Brazil, the
U.S. medical school application process is highly competitive and has historically seen increasing medical course applications. In 2018,
21,622 U.S. students were enrolled out of 52,777 medical school applicants, representing an applicants per enrolled student ratio of 2.4x.
Additionally, the number of medical school applicants increased at a 2.7% Compound Annual Growth Rate, or CAGR from 2010 to 2018, according
to the AAMC.
While Brazilian students have the option to either pursue
a medical residency or work as a generalist after graduating, U.S. students are required to go through a residency program after completing
medical school to become an authorized physician. To do this, the student must enroll in the National Residency Matching Program, or NRMP,
which matches physician applicants to U.S. residency training programs. In 2017, 35,969 U.S. medical school graduates applied for 31,757
residency positions, representing an applicants per enrolled student ratio of 1.2x. To complete the program and become an authorized physician,
each student must also pass the United States Medical Licensing Examination, or USMLE.
The diagram below illustrates the structure and timeline
of the Brazilian medical education system relative to the United States:
Source: MEC
Source: AAMC
Regulatory overview and “Mais Médicos” program
Medical education in Brazil is subject to regulatory
terms that aim to define the supply of medical seats across the country. From 2013 to 2018, the Brazilian government put initiatives in
place to increase the number of annual medical school and residency vacancies, which have been recently revised.
In 2013, Law No. 12,871 defined the protocol for the
creation of new medical courses in Brazil to address issues such as the unequal distribution of doctors across Brazilian states. Among
the criteria that support the creation of medical schools seats, two relevant aspects are (i) the importance of these new openings
in a specified region and (ii) the sufficiency of the current medical infrastructure in both public regional hospitals and in the
applicant medical institution in order to obtain government authorization.
To reduce the shortage of doctors and mitigate the perceived
healthcare inequality, the Brazilian federal government implemented a strategic initiative called “Mais Médicos.”
The program’s main objectives included addressing the provision of doctors for primary care in municipalities, strengthening health
care infrastructure, and allocating medical workforce to underserved areas.
According to WHO, from its inception in 2013 until 2018,
“Mais Médicos” assigned physicians to over 4,000 municipalities benefiting poorer areas. For example, during
that period, 63% of physicians working in this program in northeastern Brazil were assigned to work among the region’s poorest municipalities.
Until July 2014, 91% of the municipalities in northern Brazil with a shortage of physicians had been provided, on average, almost five
physicians per municipality. Studies have demonstrated there was a significant increase, from 62.7% to 70.4%, in the population receiving
primary care coverage from 2014 to 2016.
Regarding academics, “Mais Médicos”
implemented short- and long-term measures to improve the Brazilian medical training system in both quantitative and qualitative ways.
Among these measures was the opening of new medical school slots, in both undergraduate courses and residency programs. From its creation
in 2013 until 2018, “Mais Médicos” reached an annual contribution of 11,400 new student slots in medical schools
as well as 12,400 student slots for medical residency.
With the increase in annual offerings through “Mais
Médicos,” the MEC announced on April 5, 2018, that the government had decided to freeze the new offering of medical seats
for a period of five years. The decision was based on the previously defined target of at least 11,000 annual medical seats, which according
to WHO had already been achieved. However, on April 5, 2023, MEC issued Ordinance No. 650/23, which revoked the suspension under Ordinance
No. 328/18 and set new rules for the opening of new medicine courses. In particular, MEC will be required to conduct a public call for
new courses, i.e., through the Mais Médicos program pursuant to Law No. 12,871/2013, and subject any such courses to the
prior review by the Interministerial Commission for Health Education Management (Comissão Interministerial de Gestão
da Educação na Saúde). By August 4, 2023, MEC must commence this public call and set the rules, procedures, decision-making
standards and the calendar in connection with the fulfillment of medicine course vacancies, this will result in the creation of new medical
education courses or medicine course vacancies, which will in turn increase competition. As a result, we may be required to reduce our
tuition fees or increase our operating expenses (including our costs per student) in order to retain or attract students or to pursue new market opportunities, and reduce
our ability to fill all our medical seats capacity.
Brazilian medical education quantitative assessment
Given the national regulatory framework, expanding medical
seats depends mostly on quality attributes and the need for additional doctors in the given geography. The number of medical seats remained
approximately unchanged between 2005 and 2012, but increased at a faster pace from 2012 to 2014 to mitigate the shortage of physicians
in the country.
Over the last ten years, “Mais Médicos”
has raised the medical seats offerings. From 2013 to 2022, it created approximately 21,000 seats in medical schools throughout the country,
which contributed to the increase in enrollment in private medical schools.
From 2012 to 2022, first-year enrollments in private
medical schools have increased by 20,386, representing a 10.6% CAGR, compared to an additional 2,901 public medical first-year enrollments
during that period.
According to the Demografia Médica do Brasil report—which
is co-produced by the Brazilian Medical Association (Associação Médica Brasileira) and the University of São
Paulo, Brazil, or Demografia Médica—the number of physicians in Brazil increased from 310,800 to 562,200 from 2010 to January
2023, representing an 80.8% increase. With that demand in place, a supply of new healthcare professionals is expected to keep growing
to keep up with the increased demand for public and private health services.
By January 2023, the total number of physicians in Brazil
increased to 562,229 professionals, implying 2.60 doctors per 1,000 inhabitants.
Projection of the number of physicians in Brazil
(2019 to 2028)
Source: Demografia Médica, 2022.
Fundamentals of medical education in Brazil
The medical education market in Brazil is supported mainly
by the higher demand for medical courses than the actual seats offering, the low and uneven medical density when compared to the Organization
of Economic Cooperation and Development, or OECD average, Brazil’s fast aging population, and compelling financial rewards for those
seeking to pursue a medical career.
Brazil’s aging population
Brazil’s aging population is expected to drive
an increase in demand for physicians and other healthcare service providers. Brazil’s aging ratio is twice that of the United Kingdom
and three times that of the United States. Compared to 1995, life expectancy at birth is up from 66 years to 76 years, driven primarily
by medical and health improvements.
By 2030, 13.5% of the Brazilian population is expected
to be older than 65 years, compared to 7.3% in 2010. Furthermore, in 2060, the percentage of the population of 60 years and older is expected
to exceed the number of people of 19 years and under, according to the Instituto Brasileiro de Geografia e Estatística,
or IBGE.
Population distribution by age group—Brazil
Source: IBGE.
Increase in medical services demand
The long-suppressed demand for health services in Brazil
is expected to continue to increase given demographic changes in Brazil as well as a larger portion of the population being able to access
private healthcare services. As of December 31, 2020, Private Health Insurance penetration in Brazil reached 24.2%, according to data
from ANS. This is lower than countries such as Germany, Australia and the United States, which according to the OECD have 33.9%, 54.9%
and 63.0% penetration, respectively. Even with the expected increase in medical graduation, the demand for healthcare services is expected
to surpass the current supply of physicians by medical schools creating a continued demand for medical courses and graduate education.
According to Demografia Médica, Brazil currently
has 2.6 doctors per 1,000 inhabitants, which is considerably below the international average and the average of developed countries, which
have been through the demographic changes that are expected to happen in Brazil. For example, according to Demografia Médica, Italy
had an average of 4.13 doctors per 1,000 inhabitants in 2022. Considering the projections of a total of 564,363 physicians in 2023 versus
Brazil’s population growth over the same period, Brazil would still have approximately 2.6 doctors per 1,000 inhabitants, which
is still below the OECD average.
Doctors per thousand inhabitants, according to selected
OECD countries (2022).
Source: OECD.
Shortage and distribution of medical professionals in
Brazil
Brazil’s low medical density and inequality in
physician distribution is illustrated in the figure below. São Paulo and Rio de Janeiro have 3.5 and 3.8 doctors per 1,000 inhabitants,
respectively, while the states of Pará and Acre have 1.2 and 1.4 doctors per inhabitant, respectively. The north and northeast
regions are Brazil’s most underserved areas and have been the focus of governmental physician assignment programs. According to
Demografia Médica, the Brazilian average of physicians per 1,000 inhabitants is 2.6, while the average outside urban capitals is
1.8.
Even with the expected increase in physicians over the
next 10 years, Brazil’s medical density is expected to remain low when compared to developed countries, and is not expected to achieve
the average medical density of the OECD.
Distribution of doctors according to Brazilian states—2022
Source: Demografia Médica, 2022.
Compelling financial rewards for pursuing a medical career
One of the notable arguments for pursuing a medical career
in Brazil is the financial outcome for the future physician, with higher salaries and fast payback. The main points of view that support
the increasing demand for medical education analysis are: (i) nearly 100% employability of medical school graduates in Brazil; (ii) significantly
higher salaries for medical school graduates than those enrolled in engineering courses (by approximately 44%), and (iii) a five-year
post-graduation average payback period.
Source: Instituto de Pesquisa Econômica
Aplicada—IPEA, Brazilian Ministry of Labor, CAGED, eSocial, Empregador Web, Third-party consulting firm analysis.
Even when considering the comparatively high tuition
paid during the six-year medical undergraduate program, its above average income after graduation results in an average payback period
of five years, a relatively short period compared to other undergraduate education majors.
Supply and demand imbalance for medical education
The number of applicants for medical school remained
relatively constant from 2014 to 2017, with 196,000 applicants in both years. This compares to a 12.5% CAGR for the increase of seats
openings for medical schools in the same period. Although student seats have been increasing at higher rates, there remains a significant
gap between the demand and supply of medical education, which is expected to drive continued competitiveness in medical entrance exams.
Applicants/openings for medical schools
Source: INEP, MEC, third-party consulting firm
analysis. 2017-2023 figures are projections.
Total openings for medical school (in thousands)
Source: INEP, MEC, third-party consulting firm
analysis. 2018-2023 figures are projections.
With future residency slots expected to remain virtually
unchanged over the upcoming years and an occupancy rate of approximately 60% of current residency seats available as of 2017, increased
competitiveness is expected in residency programs.
Applicants/openings for medical residency
Source: MEC. 2019-2023 figures are projections.
Expansion in graduate programs and CME
The number of public and private medical graduate courses
is not measured by any institution, as it is developing and growing as residency slots become increasingly restricted. Typically educational
institutions partner with hospitals to provide an adequate infrastructure for teaching students. Unlike residencies, students pay out-of-pocket
monthly tuition of around R$4,000, according to a third-party consulting firm. These are usually one to two year courses and there is
currently no government student financing for this segment.
Market assessment and forecasts on medical education
Medical schools
There are currently 337 medical schools in Brazil, of
which 60% are private and 40% are governmentally run, according to MEC. In terms of student seats, the relative distribution is comparable:
68% are private while 32% are governmentally run. The market is also highly fragmented. A student that begins a medical school program
at the age of 18 would typically be expected to complete the program at 24 years old.
The medical schools segment shows that the current supply
of students’ seats in medical courses has not been sufficient to service the growth in demand for medical education in Brazil. The
total number of enrolled medical students in private schools reached 108,000 in 2018 and is expected to increase
to approximately 166,000 in 2023, assuming there will not be new openings by the government in the next five years.
Total students enrolled in private universities (in
thousands)
Source: INEP, third-party consulting firm analysis.
2019-2023 figures are projections.
With the increasing demand creating a favorable scenario
for medical school tuition, a rise in the average current tuition is expected to post a 5.1% CAGR in the next five years and to reach
R$119,000 in 2023, according to a third-party consulting firm. Both increases in the number of enrolled students and average tuition support
a market 14.9% CAGR between 2018 and 2023, implying that the current R$10 billion market would grow to become a R$19.8 billion market
by 2023.
Residency and preparatory courses
The number of medical residency student slots available
each year is regulated by the MEC and the Ministry of Health. Only hospitals are allowed to offer residency slots and no educational institution
does it unless it has its own teaching hospital. Each student receives a scholarship from the government for the duration of their residency
(from one to two years). Given the perceived lack of funding from the government, the number of residency students seats is expected to
remain approximately unchanged in the future.
Openings for medical residency (in thousands)
Source: MEC.
According to Demografia Médica, in 2017, there
were 790 hospitals that offered residency programs. The market is fragmented and the number of students’ seats varies depending
on the specialty the physician is looking for. In 2018, four main areas of interest corresponded to the first choice of approximately
40% of recently graduated students applying to residency programs. A student that begins a medical residency program at the age of 24
would typically be expected to complete the program at 26 or 27 years old, depending on the student’s chosen specialty.
Assuming that 80% of the students enrolled in the fifth
and sixth years of medical schools have an interest in taking the R1 test and that the R3 students will continue to grow at current rates,
the preparatory courses segment is expected to grow from its current market size of R$1.0 billion to approximately
R$2.4 billion by 2023, at a 18.7% CAGR.
Graduate programs
Similar dynamics affect the graduate segment, in which
a student that begins a graduate program at the age of 24 would typically be expected to complete the program at 26 or 27 years old, depending
on the chosen course. Graduate courses are expected to benefit from the increase in new physicians graduating over the coming years, and
have an average duration of two to three years. The current graduate market accounts for a total of R$3.7 billion and is expected to grow
at a 13.5% CAGR until 2023. According to a third-party consulting firm, the implied applicant/opening ratio for medical residency programs
was 4.3 in 2018.
This increase is primarily supported by the continuing
need for specialization, which is expected to raise the current 77,000 students to approximately 118,000 students by end of 2023. A factor
that supports the demand is the possibility of a student pursuing more than a single specialization along their career. In line with the
increasing number of enrollments, the demand for specialization is expected to see price increases during the same period, implying a
CAGR of 4.0%.
Specialization students (in thousands)
Source: MEC, third-party consulting firm analysis.
2019-2023 figures are projections.
CME
Doctors and other medical professionals are expected
to continuously educate themselves on evolving developments within their practice throughout their careers. Consequently, the CME market
in Brazil is expected to experience an increase in demand as the number of medical school graduates increases. The total number of physicians
in Brazil is expected to increase from approximately 450,000 in 2018 to approximately 530,000 in 2023.
Total physicians in Brazil (in millions)
Source: Scheffer M. et al., Third-party consulting
firm analysis. 2023-2028 figures are projections.
With both expected growth in the number of physicians
between 2018 and 2023 and a tuition adjustment over this period, the CME market is expected to reach a total value of R$2.4 billion by
2023, compared to R$1.6 billion in 2018, implying an 8.5% CAGR. The increase is also supported by the need for continued education on
new technologies and procedures, two recurring topics in the medical education segment.
Another important element of the CME market is that it
is currently not mandatory for doctors to regularly take CME courses. We expect this to change and become more in line with other countries,
where physicians must show their respective medical associations that they are up to date.
Other health non-medical school programs
Other health-related undergraduate courses which include
dentistry, pharmacy, nutrition, physiotherapy, psychology, nursing, and physical education, enrolled a total of 1.3 million students in
2018, representing a R$17 billion market. Although the impact of regulation and macroeconomic factors are comparable to those of medical
school programs, fundamentals of other health non-medical school programs differ from those of medical schools because of consumer preferences,
and the number of students is expected to remain flat. For health-related non-medical schools, average tuition growth rates are expected
to be in line with consumer inflation. These other health-related courses are expected to grow at a 13.2% CAGR between 2018 and 2023,
reaching a total addressable market of R$31.8 billion.
Non-medical health students enrolled (in millions)
Source: INEP, Third-party consulting firm analysis.
2019-2023 figures are projections.
Total health education market potential
Considering all medical segments combined, there was
an addressable market related to medical careers of approximately R$16.4 billion as of December 31, 2018 and encompassing over 700,000
lifelong medical learners, composed of:
| · | a R$10.0 billion addressable medical school market, calculated as (i) the number of medical student enrollments totaling 108,000,
based on historical enrollment trends, and the addition of new medical schools seats (as published by the MEC), multiplied by (ii) the
estimated R$92,400 average annual tuition per student, based on an average of the annual tuition fees charged by private medical schools
in Brazil; |
| · | a R$1.0 billion addressable residency preparatory courses market, calculated as (i) the number of medical residency candidates
totaling 71,000, based on historical medical school graduation records and the number of medical school residency candidates (as published
by the MEC), multiplied by (ii) the estimated R$15,000 average annual course fees per candidate, based on an average of the
annual course fees charged by the four largest residency preparatory course providers in Brazil; |
| · | a R$3.7 billion addressable medical specialization courses market, calculated as (i) the number of physicians seeking specialization
courses totaling 76,600, based on historical medical school graduation and medical specialization course enrollment records (as published
by the MEC), multiplied by (ii) the estimated R$48,800 average annual course fees per physician, based
on an average of the annual course fees charged by the four largest medical specialization course providers in Brazil; and |
| · | a R$1.6 billion addressable continuing medical education, or CME, market, calculated as (i) the number of physicians seeking
CME courses totaling 454,848, based on the number of active physicians in Brazil (as published by the Brazilian Medical Association (Associação
Médica Brasileira)), multiplied by (ii) the estimated R$3,500 annual average amount spent per physician on CME
courses, based on the findings of a primary survey conducted by a third-party consulting firm. |
The total addressable market is expected to grow to R$31.6
billion and to over 910,000 lifelong medical learners by 2023. If the other health-related non-medical courses are added to this figure,
the addressable market increases to R$34.3 billion in 2018 and a projected R$64.9 billion in 2023.
Market Opportunity
According to a third-party consulting firm, the total
addressable market for the medical and healthcare career segment in Brazil was R$66.5 billion as of March 31, 2020, composed of (i) a
R$14.0 billion medical school market, (ii) a R$1.5 billion residency preparatory courses market, (iii) a R$4.8 billion medical
specialization courses market, (iv) a R$1.8 billion continuing medical education market, (v) a R$23.0 billion other health courses
market and (vi) a R$21.4 billion medical digital services market. We estimate that we currently capture approximately 1.5% of the
total addressable market based on our revenue for the last 12 months ended June 30, 2020. This market encompasses over 800,000 lifelong
medical learners in Brazil, composed of 136,000 medical students, 91,000 students seeking residency preparatory courses, 90,000 and 500,000
physicians seeking to enroll in specialization courses and CME, respectively, and 1,680,000 students in other health courses.
Medical education in Brazil benefits from a combination
of demographic and social factors, such as the expected increase in the number of people over 65 due to the increase in average life expectancy,
as well as the shortage of medical professionals in Brazil, which has resulted in an imbalance between supply and demand. It also benefits
from macroeconomic and financial factors, such as the increase in average household income, which has resulted in an increase in demand
for medical services and an increase in private and public healthcare spending. Accordingly, we expect the medical education market in
Brazil to continue to grow.
Additionally, given our end-to-end and physician-centric
ecosystem, our strong business model, and our reputation for quality, we believe that we are well positioned to take advantage of the
favorable growth dynamics of the medical education market in Brazil. According to a third-party consulting firm, the total addressable
market for medical education is expected to grow at a CAGR of 10.4% from 2020 to 2025, reaching R$23.0 billion in 2025. Including other
healthcare education services, the addressable market is expected to grow at a CAGR of 9.6% in the same period, reaching R$105.3 billion
by 2025.
Information |
Medical
School |
Preparatory
Courses for
Residency |
Specialization
Courses |
Continuing
Medical
Education |
Other Health
Courses |
Medical Digital
Services |
Total |
Total market (2020)(1) R$ billion |
14.0 |
1.5 |
4.8 |
1.8 |
23.0 |
21.4 |
66.5 |
Total market (2025)(1) R$ billion |
23.0 |
3.0 |
9.1 |
3.0 |
35.0 |
32.2 |
105.3 |
CAGR (5 years) |
10.4% |
14.9% |
13.6% |
10.8% |
8.8% |
8.5% |
9.6% |
AVG Ticket (2020)(1) R$ |
103,000 |
16,000 |
53,000 |
3,900 |
14,000 |
|
|
Total number of students (2020)(1) |
136,000 |
91,000 |
90,000 |
500,000 |
1,680,000 |
|
|
Total number of students (2025)(1) |
171,000 |
143,000 |
142,000 |
600,000 |
2,110,000 |
|
|
Afya’s market share (2020)(2) |
6.7% |
12.6% |
5.0% |
— |
— |
|
|
Source: Third-party consulting firm as of March
31, 2020.
| (1) | Estimated by the third-party consulting firm. |
| (2) | Afya’s total students 2020 / total number of students 2020, by segment. |
Underlying Trends of Medical Education in Brazil
In addition to a large and underpenetrated total addressable
market, we have identified other trends that contribute to the strength of the markets we serve:
| · | Increased life expectancy and demand for medical services: The Brazilian population is aging at the fastest rate in its recent
history. Average life expectancy is currently 76.2 years, and the number of people over 65 should double from 7% of the total population
in 2012 to 14% of the total population in 2033. This has led to, and is expected to continue to drive, increased demand for healthcare
professionals. In addition, private healthcare spending and public healthcare spending in Brazil grew at a CAGR of 14.0% and 11.8%, respectively,
from 2010 to 2015, primarily due to an increase in demand for medical services as a result of an aging population and an increase in average
household income. These trends have continued since 2015 to date. |
| · | Shortage of medical professionals in Brazil: There is a shortage of medical professionals in Brazil, primarily due to the uneven
socio-economic environment. On average, Brazilian cities with less than 50,000 inhabitants, which corresponds to approximately 90% of
all cities in Brazil, have less than one physician per 1,000 residents. Brazil is expected to have an average of 3.07 physicians per 1,000
inhabitants by 2028, below the average of 3.4 for 2018 Organization for Economic Cooperation and Development, or OECD, countries. |
| · | Attractive financial incentives: The medical profession is lucrative. Medical professionals are highly employable, with salaries
that are on average more than three times higher than the average salary for other professions such as engineering, nursing and law, and
1.9 to 3.8 times higher than the net present value of engineering, nursing or law programs in Brazil. |
| · | Supply and demand imbalance for medical education: The number of available medical course seats in Brazil is controlled by
MEC, which has limited medical school intakes to current levels until 2023, resulting in a significant imbalance between supply and demand.
In the last three years, medical schools have on average received five applications per available medical course seat, and four applications
per available residency program vacancy, and the number of applications are expected to increase. We believe that graduate courses will
gradually become a more popular, high-demand destination for physicians that are not admitted into residency programs. |
| · | CME Expansion: The growing number of physicians in Brazil and the demand for ongoing education on new medical procedures, drugs,
technologies and developments will continue to drive demand for CME. |
| · | Technological innovation is driving medical education: The current generation of medical students and professionals requires
instantly accessible digital content. Over 600,000 biomedical articles have been published globally every year since 2005, and it is critical
for lifelong learners to be able to access information and learning methodologies regardless of location and physical availability. |
| · | Limited scope of existing product offerings: By generally limiting their focus on individual aspects of a student’s education
cycle, traditional education providers have struggled to build comprehensive student track records and profile databases. Consequently,
there is a general lack of integrated platforms that apply accumulated student information to efficiently tailor experiences to, or produce
bespoke materials for, the particular needs of each student. |
We believe we are well-positioned to take advantage of
this market and its trends, bringing a more effective, personal and diversified service to our students, which will enable us to continue
to grow our market share.
Our Competition
We believe we are the only company in Brazil with a focus
on the entire learning career of a physician. However, several companies provide solutions that compete in some of the markets in which
we operate.
We compete directly or indirectly with other post-secondary
institutions that offer medical courses or any of the other higher education courses in our portfolio. This market is very fragmented
and currently, there are more than 300 other institutions that offer medical courses in Brazil. The following table sets forth our main
competitors and the number of approved medical seats they had as of December 31, 2022:
Number of Approved
Medical Seats |
Company |
As of
December 31, 2022 |
Afya Brazil |
3,163 |
Player 1 |
2,097 |
Player 2 |
1,533 |
Player 3 |
521 |
Player 4 |
556 |
The market for graduate medical courses is relatively
new and a few small players operate in this segment.
Our Products and Services
We offer the following educational products and services
to lifelong medical learners enrolled across our evolving distribution network, as well as to third-party medical schools.
Medical Schools
| · | A fully integrated core curriculum is offered to our medical school students across all our campuses. |
| · | All our medical students have access to our supplemental instructional platforms as part of the internship module of their medical
course, which we implemented for all incoming medical students of the fifth and sixth academic year. |
| · | As of December 31, 2022, this product had 17,968 enrolled students, and had total historical combined tuition fees of R$2,032.9 million
for the year ended December 31, 2022, which represented 30.9% and 77.1% of our total number of undergraduate enrolled students and our
historical undergraduate programs combined tuition fees, respectively. As of December 31, 2021, this product had 16,017 enrolled students,
and had total historical combined tuition fees of R$1,511.4 million for the year ended December 31, 2021, which represented 26.2% and
75.9% of our total number of our undergraduate enrolled students and our historical undergraduate programs combined tuition fees, respectively.
As of December 31, 2020, this product had 11,030 enrolled students, and had total historical combined tuition fees of R$911.0 million
for the year ended December 31, 2020, which represented 30.5% and 73.7% of our total number of our undergraduate enrolled students and
our historical undergraduate programs combined tuition fees, respectively. |
Medical Residency Preparatory Courses
| · | Instructional content in digital format is offered to medical students and newly graduated physicians to prepare them for medical
residency exams. |
| · | Supplementary instructional content in digital format is offered to third-party medical schools that adopt our services. |
| · | As of December 31, 2022, we had 14,569 enrolled students in our medical residency preparatory courses. As of December 31, 2021, we
had 21,631 enrolled students in our medical residency preparatory courses. As of December 31, 2020, we had 13,039 enrolled students in
our medical residency preparatory courses. |
Graduate Courses
| · | Graduate medical courses are offered to our medical school students across all our campuses. These students also have access to some
of our supplemental instructional platforms. |
| · | Supplemental instructional content for different medical specializations is offered to individual lifelong medical learners in our
graduate courses. |
| · | As of December 31, 2022, we had 4,280 enrolled students in our graduate courses. As of December 31, 2021, we had 3,189 enrolled students
in our graduate courses. As of December 31, 2020, we had 4,181 enrolled students in our graduate courses. |
Other Programs
| · | Other national core curriculum is offered to all students across all of our undergraduate campuses: healthcare degrees and a subset
of non-healthcare degrees, including business and engineering degrees offered by the companies we invested in or acquired. |
| · | As of December 31, 2022, these programs had 40,232 enrolled students, and had total combined tuition fees of R$2,241.8 million for
the year ended December 31, 2022, which represented 69% and 22.8% of our total number of enrolled students and our historical undergraduate
programs combined tuition fees, respectively. As of December 31, 2021, these programs had 45,101 enrolled students, and had total combined
tuition fees of R$478.7 million for the year ended December 31, 2021, which represented 73.8% and 24.1% of our total number of enrolled
students and our historical undergraduate programs combined tuition fees, respectively. As of December 31, 2020, these programs had 25,176
enrolled students, and had total combined tuition fees of R$325.5 million for the year ended December 31, 2020, which represented 41.0%
and 14.0% of our total number of enrolled students and our historical undergraduate programs combined tuition fees, respectively. |
Digital health services
| · | Subscription-based mobile app and website portal focused on assisting health professionals and students with clinical decision-making
for 30 medical specializations through tools such as medical calculators, charts and updated content, including prescriptions, clinical
scores, medical procedures and laboratory exams, among others. |
| · | Free instructional content we offer to physicians, healthcare professionals and students. |
| · | As of December 31, 2022, we had approximately 260,710 monthly active users, consisting of approximately: 16,539 in Content and Technology
for Medical Education, 221,762 in Clinical Decision Software, 20,936 in Clinical Management Tools and 1,473 in Physician-Patient Relationship. |
| · | Our acquisition of PEBMED marked our entry in the digital health services sector, which we believe adds value to our platform. In
particular, our acquisition of PEBMED included the Whitebook product, which added approximately 125,300 active users to our platform and
increase our penetration in the segments in which we already operate through digital health services. |
The following chart sets forth our market share by career
aging cohort as of December 31, 2022:
Our Lifelong Medical Learner Clients
As of December 31, 2022, we had a total of 82,936 students
across all our segments, including 17,968 enrolled in our undergraduate medical programs. As of December 31, 2022, we had 20,456 enrolled
students in our medical residency preparatory courses and 4,280 enrolled students in our medical specialization programs.
In addition to health sciences courses, which comprise
medicine, dentistry, nursing, radiology, psychology, pharmacy, physical education, physiotherapy, nutrition and biomedicine, we also offer
degree programs and courses in other non-health sciences subjects and disciplines across several of our campuses, including undergraduate
and post graduate courses in business administration, accounting, law, civil engineering, industrial engineering and pedagogy. These non-health
sciences courses are not part of our core business—the number we offer has increased as a consequence of our strategic acquisitions
in recent years of multi-disciplinary schools with strong health sciences programs, which are our principal focus. Although non-health
courses are not part of our growth strategy, we expect to continue to offer them to the extent they generate local demand. These non-health
sciences programs represented 10.1%, 12.0%, and 14.0% of total historical undergraduate programs combined tuition fees for all courses
offered in 2022, 2021 and 2020.
The attractive dynamics for medical education in Brazil,
including high demand for medical services and low medical density, combined with the exceptional rewards a physician receives (e.g.,
high wages, fast payback), create the perfect environment for us, with high demand for health sciences programs throughout the entire
medical career. This scenario enables us to target a unique student profile during our selection process, capturing the most capable individuals
in Brazil.
According to Educainsights, medical students are, at
the outset of their medical journey, different from students that pursue other career paths. For example, while 27% of students from non-medical
undergraduate courses have a private high school background, that number increases to 82% for medical students. In addition, 64% and 65%
of medical students have a father and mother with at least a higher education diploma, respectively, while for non-medical courses, these
figures are 16% and 22%, respectively. As a result, we are able to create a distinguished network of Afya students, which we believe is
essential to the success of our long-term brand building initiatives.
The following chart sets forth certain differences between
medical and non-medical students in Brazil:
In addition, as of December 31, 2022, we had 16 contracts
with other partner companies, which represents our B2B segment. These partnerships allow us to increase our distribution outreach to other
institutions around the country and help us achieve our mission.
Student Financing and Incentive Programs
Student financing program—Fundo de Financiamento
Estudantil (“FIES”)
FIES is a MEC program created by Law No. 10,260/2001
to provide financing to undergraduate students who are unable to finance their own education.
After going through several reforms from 2015 onwards,
the government launched the “New FIES” in early 2018, to be provided in the following categories:
| · | Public FIES—Per capita income of up to three minimum wages, with zero interest rate. The financing is provided by federal government
funds and contributions from Higher Education Institutions, or HEIs, through the fund FG-FIES. Therefore, the credit risk is divided between
the government and the private HEIs. |
| · | Private FIES (“P-FIES”)—Per capital income of up to five minimum wages, with low interest rates. Regional funds
and private financial institutions, provide the financing. |
As of December 31, 2022, our exposure to FIES was 6.4%
of our total student base, which represented 8.3% of our total gross revenue for that period. See “Item 3. Key Information—D.
Risk Factors—Certain Risks Relating to Our Business and Industry—Changes to the rules or delays or suspension of tuition payments
made through FIES may adversely affect our cash flows and our business.” for further information.
Incentive program—Programa Universidade Para Todos
Programa Universidade Para Todos, or PROUNI, was
established in 2005 through Law No. 10,096/2005, which offers full and partial scholarships (50%), in private HEIs for undergraduate and
subsequent courses of specific training, to Brazilian students without a higher education diploma. Additionally, the Government offers
federal tax exemptions to the higher education institutions adhering to PROUNI.
Private higher education institutions, whether for profit
or not, may join PROUNI by signing a term of adhesion (valid for 10 years), and at least (i) offer a full scholarship for every 10.7
students who pay a regular monthly fee and are regularly enrolled at the end of the previous school year; or (ii) an integral scholarship
for every 22 students who pay the regular monthly tuition fees in specific undergraduate and subsequent courses, provided they also offer
scholarships of 50%, in amounts necessary so that the sum of the benefits granted is equivalent to 8.5% of its annual revenue.
The tax exemptions (in whole or in part) for HEIs that
participate in this program are the following:
| · | IRPJ (income tax) and CSLL (social contribution), with respect to the portion of net income in proportion to revenues from traditional
and technology undergraduate programs; and |
| · | COFINS (Contribution for the Financing of Social Security) and PIS (Program of Social Integration), concerning revenues from traditional
and technology undergraduate programs. |
As of December 31, 2022, our exposure to PROUNI was 8.8%
of our student base. Although we fulfilled all required scholarships to receive 100% of tax exemption, PROUNI does not cover our operation
outside of our undergraduate programs.
Other private financing program
Afya offers private financing program through external
partners (Banco Santander and Raydan) for undergraduate students. The credit risk is taken 100% by the partner.
Key Benefits for our Lifelong Medical Learners
We believe the end-to-end physician-centric ecosystem
we have been developing for our students sets us apart from our peers, as we deliver content and learning activities that are tailored
to each student’s needs. This contributes to a more interactive and enjoyable learning process for our students, breaking away from
a teaching system that we perceive as presenting students with an overwhelming amount of content, unengaging classes and scattered information.
We achieve this based on three main pillars: innovative data-oriented methodology, a cutting-edge platform and state-of-the-art operating
environment.
Innovative, Data-oriented Methodology
Our proprietary methodology to support our students’
lifelong medical education is based on the following concepts:
Standardized medical curricula: The organization
of our medical curricula around interdisciplinary macro-medical topics to guide the development of in-person teaching plans and online
learning tools, offering a scalable solution for schools through weekly synchronized content;
Active learning: Educational strategy to foster
independent, critical and creative student thinking, as well as encourage effective teamwork through case-based problem-solving exercises,
debates and small-group discussions;
Blended learning: Balanced in-person teaching
with technology-assisted activities to improve student and teacher efficiency and results; and
Adaptive learning: A personalized instruction
and assessment tool that provides training and content tailor-made to each student’s individual profile. Students can access real-time
feedback on areas in which they can improve, effective learning methods and teaching/study plans that are most suitable for them.
Cutting-Edge Digital Platform
We deliver modern, bespoke verbal and practical teaching.
We continuously invest in creating innovative, technology-enabled activities and features to enhance our platform. We offer our medical
school students doing internships or studying for residency exams the following features through our digital platform:
Web portal and in-app communication: Online platform
combining supplementary instructional content and a personalized communication tool for students, through which they can also access our
content offline;
Learning tools: We have over 43,646 digitally
managed and delivered instructional tools designed by teachers to address complex learning objectives. Content is organized and tagged
by theme and delivered in various formats, including, among others, online classes, podcasts, quizzes and books, to cater to different
learning methods and the preferences of each student. As of December 31, 2022, our learning tools consisted of more than 27,768 video
classes, 5,991 book chapters, 5,193 podcasts and an exam bank of 123,948 questions.
Assessment tool: Broad database suite composed
of quizzes and problem-solving activities, through which students can choose the subjects they would like to focus on, with additional
teacher-led instructional content;
Tutoring/mentoring platform: An online monitoring
and support platform for both undergraduate and graduate medical students, which we launched in October 2019. The platform allows tutors
to interact with students through emails, video calls, voice calls and push notifications, and keeps records of such interactions. It
also allows students to ask the tutors questions and schedule appointments. The platform also tracks individual student performance and
progress; and
Digital health services platform: A combination
of mobile and web applications focused on helping physicians, nurses, healthcare professionals and medical students in their clinical
decision-making and providing medical references and updates for the medical community.
State-of-the-Art Operating Environment
For us, individualized learning should be used not just
when offering content or technology-supported activities, but also during in-person encounters. Our professors can use our resources to
approach lessons more objectively, focusing on each student’s needs:
Modern teaching facilities: We have designed our
classrooms to engage students in active learning. We rely on cutting-edge didactical equipment and simulation labs and state-of-the-art
realistic simulation technologies;
Medical specializations centers: Our campuses
offer simulation centers and clinics where students can practice primary and secondary care, leveraging the learning process and providing
medical assistance to the local population; and
Practical learning network: Throughout the internship
cycle, our students can access over 60 partner teaching hospitals and clinics, the largest network of any education group in Brazil.
Evolving Distribution Network
We believe that an effective end-to-end physician-centric
ecosystem goes beyond offering the largest and most complete operating infrastructure to the students enrolled at our campuses and with
access to our digital platforms. Through our evolving distribution model, we also expect to empower lifelong medical learners across our
growing network of diversified partner teaching hospitals, clinics and third-party medical schools by increasing our products and services
offerings as we continue to expand our business-to-business, or B2B capabilities. Our partnerships include renowned institutions such
as the Brazilian Cancer Foundation, which joined our network in January 2020.
Seasonality of Operations
Afya has three reporting segments: (1) Undergrad, which
provides educational services through undergraduate courses related to medicine, other health sciences and other undergraduate programs;
(2) Continuing Education, which provides specialization programs and graduate courses; and (3) Digital Services, which provides content
and technology for medical education, clinical decisions software, practice management tools and electronic medical records, doctor-patient
relationship, telemedicine and digital prescription.
Undergrad segment revenues are related to the intake
process and monthly tuition fees charged to students over the period; accordingly, this segment generally is not subject to significant
fluctuations from quarter to quarter. Continuing Education segment revenues are related to monthly intakes and tuition fees and generally
is not subject to significant fluctuations from quarter to quarter.
Digital Services is comprised mainly of Medcel, Pebmed,
and iClinic revenues. While Pebmed and iClinic generally do not experience significant fluctuations resulting from seasonality, Medcel’s
revenue is concentrated in the first and last quarter of the fiscal year due to the period of enrollments of Medcel’s clients. In
addition, the majority of Medcel’s revenues are derived from printed books and e-books, which are recognized at the point in time
when control is transferred to the customer. Consequently, the Digital Services segment generally has higher revenues and results of operations
in the first and last quarters of the fiscal year than in the second and third quarters of the fiscal year.
Marketing and Sales
Our marketing strategy is focused on identifying, qualifying
and converting potential students into enrollments.
We execute our marketing strategy as follows:
| · | Identification: We use online and offline media channels to distribute relevant content for all decision-making phases of current
and future physicians, so that they interact with our solutions throughout their learning careers. |
| · | Qualification: After we obtain data on a potential student, we identify his/her needs by offering content that matches his/her
academic phase. In addition, through our score models, we can identify potential students that are more likely to enroll with us. |
| · | Conversion: From that point on, we contact our sales department (online and inside sales) to convert potential students into
enrolled students through structured sales campaigns and continuous monitoring of conversion indices. |
As our business model is end-to-end and physician-centric,
we aim to accompany our lifelong learners at each stage of their careers. Therefore our sales funnels are calibrated according to the
segment’s supply-demand curve (graduation, preparatory, etc.), level of competition and other strategic variables.
For example, in medical schools, the most challenging
task is to identify potential students interested in attending medical school in a given cycle, since conversion typically occurs organically
due to the high demand for these courses. Our challenge is to attract and enroll the best ENEM students in our medical schools. With respect
to the medical residency preparatory phase and graduate programs, our main focus is to show potential students the benefits of our methodology in terms of results and cost-benefit in order
to guide them towards adopting our solutions.
Our marketing and sales efforts are supported by Salesforce
products (Sales Cloud, Marketing Cloud and Einstein), as well as other online analytical tools such as Google Analytics.
Our business model, combined with the use of CRM tools
gives us a unique competitive advantage: The ability to identify, market and offer products to virtually all medical students and physicians
in Brazil.
Technology and Intellectual Property
Technology
In recent years, we have implemented several initiatives
to improve operational efficiency and to integrate processes across several campuses and operations. We plan to continue this process
in the future to fully consolidate Afya Brazil’s integrated systems with those of our recent acquisitions.
Shared Services Center
We have invested in a modern Shared Services Center,
or SSC, to process back-office and non-student facing transactions that has idle capacity and is expected to enable student base growth
with low marginal costs.
Integrated Systems
We have adopted third-party systems to handle our internal
systems in a fully integrated manner:
| · | Enterprise Resource Planning, or ERP: TOTVS ERP RM is the leading solution in the Education Industry in Brazil and delivers
a flexible systemic solution that fits our companies’ processes to improve management and organization. At the same time, it allows
high governance of the processes, with complete control of all back-office activities, preventing operational errors and allowing efficient
tax-related calculations and control of government obligations. |
| · | Academic System: TOTVS RM Educacional is a mature platform that allows the configuration of the student payment plan attached
to the disciplines enrolled and processes preventing manual financial transactions and making the process more flexible and efficient.
This system includes both Student and Faculty Portals, with features that allow mobile frequency monitoring and provide payment solutions
to students and also manages the faculties’ timesheet and payroll. |
| · | Learning Management System, or LMS: Canvas LMS is a cloud-native, highly scalable system that connects all digital learning
tools and evaluation resources accessed nationally by our faculties and students. |
As of the date of this annual report, iClinic, Medicinae,
Medical Harbour, Cliquefarma, Shosp, RX Pro, Além da Medicina, Cardiopapers, Glic and DelRey independently operate their own ERP
systems. We are working to migrate the systems from the companies described above in order to fully incorporate them into our integrated
systems.
Intellectual Property
We rely on a combination of copyright, trademark and
trade secret laws, as well as employee and third-party non-disclosure, confidentiality and other types of contractual arrangements to
establish, maintain and enforce our intellectual property rights, including with respect to our proprietary rights related to our products
and services. In addition, we license technology from third parties.
As of December 31, 2022, we owned 38,541 learning materials
(e.g., classes, materials and videos) that comply with the national curriculum and that are developed by our teachers. Moreover, as of
the date of this annual report, we had no issued patents and one patent application pending in Brazil. As of December 31, 2022, we were
party to 337 agreements, with third-party authors with respect to educational content. As of December 31, 2022, we owned 299 trademark
registrations in Brazil and we have also sought to register trademarks abroad. We had six trademark registration requests for BioAtlas (a Medical Harbour product); three in
the European Union and three in the United States of America. Our request to register trademarks in China was rejected on November 22,
2022 by the Chinese Trademark Office of National Intellectual Property Administration due to similarities with other trademarks and to
the logo allegedly representing the content characteristics of the service. As of the date of this annual report, we have 129 pending
trademark applications in Brazil and unregistered trademarks that we use to promote our brand, and also own 297 registered domain names
in Brazil.
Insurance
We have insurance policies with reputable insurers in
amounts considered sufficient by our management to cover potential losses arising from indemnities that we may have to pay to third parties
as a result of our operations. The policies for our operating units have an aggregate coverage limit of up to approximately R$330.3 million.
The Company and its subsidiaries have a risk management program with the purpose of delimiting the risks, seeking in the market coverage
compatible with its size and operations. We seek coverage against risks that are compatible with our scale and type of operations, considering
the nature of our activities, the risks we are exposed to, market practices in our industry, and the advice of our insurance consultants.
While we believe our insurance contracts reflect standard
market practices, there are certain types of risks that may not be covered by the policies (such as war, terrorism, acts of God and force
majeure, liability for certain harm or interruption of certain activities). Therefore, if any of these uncovered events occur, we may
be obliged to incur additional costs to remedy the situation, reconstitute our assets and/or indemnify our customers, which may adversely
affect us. Furthermore, even in the event that we incur a loss that is covered by our policies, we cannot assure that damages awarded
by our insurers will be sufficient to cover the losses arising from the insured event. See “Item 3. Key Information—D. Risk
Factors—Certain Risks Relating to Our Business and Industry—We may be held liable for extraordinary events that may occur
at our campuses, which may have an adverse effect on our image and, consequently, our results of operations.”
Regulatory Overview
The Brazilian Constitution establishes education as a
right for all citizens and a duty of the State and the family. Accordingly, the government is required to provide all Brazilian citizens
with access to free primary education with compulsory attendance. Private investment in education is permitted as long as entities providing
education services comply with the applicable rules and regulations.
The Brazilian education system is organized under a cooperative
management among federal, state and municipal governments. The federal branch is required to organize and coordinate the federal educational
system in order to guarantee equal opportunity and quality of education throughout Brazil. The states and the Federal District are required
to focus on secondary education, while municipalities are responsible for providing pre-primary school and primary education.
Private Higher Education Institutions are part of the
federal educational system and their activities are regulated by the federal government, and universities have didactic, scientific and
administrative autonomy as provided by the Brazilian Constitution.
Additionally, Law No. 9,394 of December 20, 1996, named
by National Education Guidelines Law (Lei de Diretrizes e Bases da Educação, or LDB) provides the guidelines for
the provision of educational services in Brazil and sets forth the federal government’s duty to, among others: (i) coordinate
the national education system; (ii) prepare the National Education Plan; (iii) provide technical and financial assistance to
the states, the Federal District and municipalities; and (iv) define, in cooperation with other federal entities, the responsibilities
and guidelines for primary and secondary education, with the federal government’s priority in post-secondary education, issuing
rules and regulations regarding undergraduate and graduate programs, and carrying out the activities relating to the accreditation of
institutions, authorization and recognition of courses and monitoring and evaluation of the educational system as a whole.
In addition, the federal government, through Law No.
10,172 of January 9, 2001, implemented the first National Education Plan (Plano Nacional de Educação, or PNE), with
a duration of 10 years from the date of its publication. The PNE established objectives for post-secondary education to be met by all
branches of government. The primary goal was to offer post-secondary education to at least 30% of the population aged 18 to 24 by 2010.
After the expiration of the first PNE, a new plan was enacted and the objectives were
revised for the period of 2014 to 2024, consolidated by Law No. 13,005 of June 25, 2014.
The new goals consist of: (1) increasing post-secondary
education enrollment rates to 50% of the population aged 18 to 24; (2) increasing the quality of post-secondary education by raising
the proportion of academic staff with master’s degrees and doctorate degrees to 75%, of which at least 35% shall be doctorates;
and (3) increasing progressively stricto sensu postgraduate programs. Such goals apply to each federation territory, and provide
orientation for the private education sector.
Finally, each of the federal, state and municipal governments
are required to prepare a 10-year education plan and to establish policies, guidelines and objectives applicable to the segment of the
Brazilian education system over which it has responsibility.
Post-secondary Education
The post-secondary education sector is subject to comprehensive
government regulation. Its purpose is to ensure the quality of educational services, through evaluations of the ability of educational
institutions to meet minimum standards established by CNE and approved by MEC. This evaluation includes the analysis of pedagogical projects,
the infrastructure of Higher Educational Institutions, or HEIs, and their academic staff, and the results of such evaluations are considered
in the proceedings for opening new units and new courses.
Therefore, activities and courses offered by HEIs in
Brazil depend on authorizations and are subject to ongoing regulation, guided by the results of quality assessments. The federal responsibility
to regulate, monitor and evaluate post-secondary education institutions and programs is exercised by the MEC, the CNE, the INEP and the
CONAES.
Ministry of Education
The Ministry of Education, or MEC, is the highest authority
for post-secondary education within the Brazilian national education system, whose competence consists, among other prerogatives, of the
following: (1) confirming CNE’s accreditation decisions for post-secondary education institutions; (2) confirming evaluation
systems and criteria adopted by the INEP; (3) confirming opinions and regulation proposals from the CNE; (4) issuing rules and
instructions for compliance with laws, decrees and regulations pertaining to education issues; and (5) regulating and monitoring
the post-secondary education system through its secretariats.
National Education Council
The National Education Council, or CNE, is a consulting
and decision-making body monitored by the MEC, collectively comprised of the Chamber of Primary and Secondary Education, or CEB, and the
Chamber of Post-secondary Education, or CES, each composed of 12 members appointed by the President of Brazil.
CNE is required, among other responsibilities, to: (i) issue
regulations to implement MEC’s guidelines, as well as advise and support MEC in its activities and decisions; (ii) decide on
accreditation applications and renewals from post-secondary education institutions engaged in distance learning, based on the opinion
of the relevant secretariats; (iii) propose guidelines and deliberate on the preparation of the evaluation instruments for accreditation
and re-accreditation of institutions to be elaborated by INEP; (iv) issue guidelines to be observed by SERES for accreditation and
re-accreditation of universities, university centers and colleges; (v) determine, through the CES, the inclusion and exclusion of
course designation from the catalog of advanced technology courses; (vi) rule on appeals of decisions issued by SERES, CEB or CES;
and (vii) analyze and propose questions regarding the application of post-secondary education legislation to the MEC.
Anísio Teixeira National Institute for Educational
Research
The Anísio Teixeira National Institute for Educational
Research, or INEP, is a federal body linked to the MEC whose main responsibilities are, among others, to: (i) design, plan, coordinate
and operationalize actions for the evaluation of HEIs, undergraduate courses and government schools, as well as the National Student Performance
Examination, or ENADE, the examinations and assessments of undergraduate students; (ii) design, plan, coordinate, operationalize
and evaluate indicators related to post-secondary education resulting from examinations and inputs from official databases, the establishment
and maintenance of databases of specialized evaluators and collaborators, including the appointment of evaluation committees; (iii) prepare
and submit to MEC the instruments for external evaluation (in loco), in accordance with the guidelines proposed
by the SERES and by other competent bodies; (iv) design, plan, evaluate and update the indicators for the external evaluation instruments
in place, in accordance with the guidelines proposed by CONAES; (v) chair the Technical Committee for Evaluation Monitoring; and
(vi) plan, coordinate, operationalize and evaluate the actions necessary to achieve its objectives.
National Higher Education Evaluation Commission
The National Higher Education Evaluation Commission,
or CONAES, is a coordination and monitoring body of the National Higher Education Evaluation System, or SINAES, monitored by MEC, composed
of a President and 13 members, including one representative of the INEP, one representative of the Fundação de Coordenação
de Aperfeiçoamento de Pessoal de Nível Superior (Foundation for the Coordination of Improvement of Post-secondary Education
Personnel, or CAPES), three representatives of the MEC (one of which must come from the body responsible for the regulation and monitoring
of post-secondary education), one representative of the student body of post-secondary education institutions, one representative of the
academic staff of post-secondary education institutions, one representative of the administrative body of post-secondary education institutions,
and five members appointed by the Minister of Education, with distinguished scientific, philosophic and artistic knowledge and proven
expertise in post-secondary evaluation or management.
Among other activities CONAES is required to: (i) propose
and evaluate the dynamics, procedures and mechanisms for institutional evaluation, courses and student performance; (ii) establish
guidelines for the organization of evaluation committees, analyze reports, prepare opinions and submit recommendations to the competent
bodies; (iii) formulate proposals for the development of HEIs, based on the analysis and recommendations produced in the evaluation
processes; (iv) communicate with the state educational systems, with the aim to establish common actions and criteria for the evaluation
and supervision of post-secondary education; and (v) annually submit for approval by the Minister of Education the list of courses
for which students will apply for the ENADE.
Organization of Post-secondary Education Institutions
In order to allow post-secondary education institutions
to fulfill their objectives, the LDB also provides that post-secondary education includes the following programs:
| · | Undergraduate courses, including traditional and technological undergraduate courses, offering specific training and diplomas
to students, open to candidates who have completed high school or equivalent and who have been approved in the respective selection or
entrance examinations; |
| · | Post-graduate courses, including master’s and doctoral degrees, specialization courses, further training courses and
others, open to candidates who hold a diploma in an undergraduate course and who meet the requirements laid down by educational institutions;
and |
| · | Extension courses, understood as any academic, technical or cultural activity that is not included as an integral and compulsory
part of the undergraduate and postgraduate curriculum, in which the students receive certificates. Such courses are open to candidates
who meet the requirements established in each case by educational institutions. |
According to the LDB, post-secondary education can be
provided by public or private institutions. A private post-secondary education institution must be controlled, managed and supported by
an individual or a legal entity with responsibility for financing its supported entities. Post-secondary education institutions may be
supported by for-profit or not-for-profit private institutions, or supporting entities, as follows:
| · | Private in the strict sense: private for-profit institutions created and maintained by one or more private individuals or legal
entities; |
| · | Community: incorporated by groups of individuals or by one or more legal entities and that include representatives of the community
in their organizational structure; |
| · | Confessional: incorporated by groups of individuals or by one or more legal entities that meet the specific confessional and
ideological orientation and that include representatives of the community in their organizational structure; or |
| · | Philanthropic, in the form of the applicable regulations. |
According to their organization and academic prerogatives,
post-secondary education institutions can be:
| · | Colleges: colleges are public or private HEIs offering post-secondary programs in one or more areas, maintained by a single
supporting entity and with isolated management and direction. Colleges are allowed to offer programs along several levels, namely bachelor’s,
associate’s, specialization and graduate programs (master’s and doctorate degrees). Colleges have minimum requirements with
regard to the qualification of faculty members and their labor practices, and cannot establish new campuses, courses, or spots without
prior authorization from MEC; |
| · | University Centers: university centers are public or private education institutions offering several bachelor’s, associate’s
and graduate programs, and are expected to provide appropriate work conditions, education and qualification opportunities for their professors.
To be considered a university center, the institution shall comply with such requirements: (i) at least one-fifth of the faculty
members of a university center must hold a master’s or doctorate degree; (ii) at least 20% of the faculty members must work
on a full-time basis; (iii) at least eight undergraduate courses shall be recognized and have obtained a satisfactory concept in
the on-site external evaluation carried out by INEP; (iv) have an institutionalized extension program in the areas of knowledge covered
by their undergraduate courses; (v) have a scientific initiation program with a project supervised by doctoral or masters professors,
which may include programs of professional or technological initiation and initiation to teaching; (vi) have obtained an Institutional
Concept, or CI, greater than or equal to four in the on-site external evaluation performed by INEP; and (vii) have not been penalized
as a result of an administrative supervision process in the last two years; or |
| · | Universities: universities are public or private education institutions offering several post-secondary programs, continuing
education and research development. Like University Centers, certain requirements for university re-accreditation must be observed, namely:
(i) one-third of the academic staff is hired on a full-time basis; (ii) one-third of the faculty members must have a master’s
or doctoral degree; (iii) at least 60.0% of the undergraduate courses shall be recognized and have a satisfactory concept obtained
in the evaluation proceedings carried out by INEP; (iv) have an institutionalized extension program in the areas of knowledge covered
by their undergraduate courses; (v) have a scientific initiation program with a project supervised by master’s or doctoral
professors, which may include programs of professional or technological initiation and initiation to teaching; (vi) have obtained
CI greater than or equal to four in the external evaluation carried out by INEP; (vii) regularly offer four master’s degree
courses and two PhD courses recognized by MEC; and (viii) have not been penalized as a result of an administrative supervision process
in the last two years. |
The LDB provides that the following powers are granted
to universities and university centers in the exercise of their autonomy, amongst others: (i) to create, organize and discontinue
post-secondary education programs on their premises, subject to the applicable regulation; (ii) to establish the curricula for programs,
subject to the applicable general guidelines; (iii) to establish plans, programs and projects in connection with scientific research,
artistic production and extra-curricular activities; (iv) to establish the number of student offerings available; and (v) to
create and change their bylaws in accordance with the applicable general rules, as well as to award degrees, diplomas and other certificates.
Distance Learning
Distance learning in Brazil is regulated by article 80
of the LDB, by Decrees 9,057 and 9,235, both of 2017, by Ordinances No. 11 and 23, both of 2017, and CNE’s Resolution No. 1, of
2016.
Distance learning is defined as the educational method
in which didactic and pedagogic processes are conducted through information and communication media and technologies, with students and
teachers interacting in educational activities while located in different locations or at different times.
Pursuant to the applicable regulations, distance learning
is subject to different factors compared to traditional methods, including: (i) reduced transmission costs in commercial channels
of sound and audiovisual broadcasting; (ii) concession of channels with exclusive educational purposes; and (iii) minimal time
reservation, with no onus on the public authorities, by the concessionaries of commercial channels.
Distance learning can be offered at the following levels
and as part of the following educational methods: (i) primary and secondary education, as long as it is used only to supplement learning
processes or in emergency situations; (ii) education for young people and adults, according to specific legal criteria; (iii) special
education, according to specific legal criteria; (iv) professional education, covering technical programs at the secondary level
and technological programs at the post-secondary level; and (v) post-secondary education, covering graduate, master’s programs,
specializations, and doctorate studies.
Graduate courses (bachelor’s, licentiate and technological)
may be offered using distance learning methods whenever a post-secondary institution is regularly accredited by the MEC for this purpose.
Pursuant to Decree No. 9,057, 2017, institutional accreditation
and reaccreditation, as well as the authorization and recognition of courses and their renewal will be subject to on-site evaluation,
with the aim to verify the existence and suitability of the method, infrastructure, technology and personnel that may enable the execution
of the activities provided in the Institutional Development Plan or PDI and the Pedagogical Project of the Course, or PPC.
HEIs accredited for the offering of post-secondary education
in the distance modality that hold autonomy prerogatives (universities and university centers) do not require authorization for operation
of the post-secondary course in the distance modality, but shall inform the MEC about the offering of the course within 60 days of the
date of creation of such course, for the purposes of supervision, evaluation and recognition. Also, accredited HEIs must inform the MEC
about the creation of distance learning supporting units and the alteration of their addresses.
Although distance learning is defined by the absence
of direct contact between students and teachers, there are activities that must be conducted on-site, such as tutorials, evaluations,
internships, professional practice, laboratory and dissertation defense, which are to be provided in the educational and development projects
of the institution and the course. Accordingly, the distance learning institutions must provide the necessary infrastructure for the students
to conduct those activities, using the headquarters of the education institution or smaller supporting units throughout the country. Distance
learning supporting units are no longer subject to on-site evaluation or required to obtain prior authorization of MEC in order to be
set up or operated. Pursuant to Ordinance No. 11/2017, such units can be created by a unilateral decision of the institution itself.
Distance courses and programs must be projected with
the same defined duration for the respective on-site courses. The evaluation of the performance of students for the purposes of promotion,
conclusion of the course and obtainment of diplomas and certificates must be conducted through the conclusion of the programmed activities
and on-site exams by the accredited HEIs, following procedures and criteria defined in respective PPC.
The evaluation of the distance learning courses is performed
in a very similar manner as the evaluation of on-site courses. In the event of any irregularity or non-compliance to any of the previously
established conditions set by the MEC, the competent body may initiate an administrative proceeding that may result in one or more penalties,
such as: (i) forfeiture of accreditation or reaccreditation to operate as a distance learning institution; (ii) intervention;
(iii) temporary suspension of autonomy prerogatives; (iv) initiate reaccreditation proceedings; (v) reduction of available
vacancies within courses; (vi) temporary suspension of new students admissions; and (vii) temporary suspension of courses offered.
Diplomas and certificates for distance learning courses
and programs from accredited institutions are valid throughout the national territory and institutions are not entitled to set different
criteria for diplomas issued for distance learning courses and those issued for on-site courses.
Distance learning courses may be offered only by HEIs
that hold specific accreditations for this purpose. It is MEC’s responsibility to promote the accreditation acts of post-secondary
institutions. To act outside the institution’s local geographic reach, the institution shall require an extraterritorial accreditation
to the MEC.
Distance learning courses or programs require periodic
renewal. Also, the accredited institution must initiate the authorized coursework within 24 months from the accreditation, and if the
institution does not implement the authorized activities in such time frame, it will be subject to an administrative
proceeding that may result in the canceling of the given authorization.
Pursuant to Decree No. 9,057/2017, post-secondary courses
may be offered in the distance learning modality through a partnership between an accredited distance HEI and another company. In this
case, applicable regulations establish that educational activities must be conducted in the facilities of the accredited HEI, which will
be responsible before MEC for the regularity of the teaching and learning processes. Accordingly, the HEI must inform MEC of its partnerships,
describing their purpose and most relevant aspects, in order for MEC to be able to assess eventual irregularities.
In any case, distance learning courses and programs are
subject to the evaluation rules of the SINAES in the same manner that on-site courses are.
Regulatory Processes of Post-secondary Education Institutions
Accreditation of Post-secondary Education Institutions
and Authorization and Recognition of Courses
A post-secondary education institution is initially accredited
as a college. The accreditation as a university or university center is only granted after the institution has operated as a college and
met satisfactory quality standards, including positive assessments in the SINAES. In addition, the HEI must fulfill other legal requirements
that could vary according to the respective category, such as the requirement that a certain percentage of faculty members meet minimum
graduation standards (i.e., a doctorate or master’s degree), and specific types of labor regimes.
The application for qualification of a post-secondary
education institution must be supported by various documents, including:
| · | Supporting entity: (i) incorporation documents, duly registered with the competent body, evidencing its existence and
legal capacity, in accordance with civil legislation; (ii) proof of registration in the National Taxpayer’s Registry or, CNPJ;
(iii) certificates of tax and social security compliance; (iv) proof of ownership of assets capable of supporting the education
institution; (v) financial statements; and (vi) consent form executed by the supporting entity’s legal representative,
vouching for the veracity and regularity of the provided information and the financial capability of the supporting entity; and |
| · | Post-secondary education institution: (i) proof of payment of the on-site evaluation fee related to the external evaluation
to be performed by INEP; (ii) PDI; (iii) bylaws and internal regulations; (iv) identification and qualification of managers,
with a description of their academic and administrative experience; (v) receipt of regularity and availability of the teaching facilities;
(vi) plan of accessibility assurance, pursuant to the regulation and followed by a technical report by a competent professional or
public body; and (vii) compliance with the legal requirements related to the safety of the building, including having an escape route
in case of fire, proved by a specific report issued by the competent public body. |
In relation to the accreditation process of a new post-secondary
educational institution and linked course authorizations, MEC may issue a temporary accreditation act to expedite the operation, pursuant
to article 24 of Decree No. 9,235/2017, as long as the supporting entity complies with all the following requirements:
| · | all self-supporting post-secondary education institutions have been reaccredited in the last five years obtaining an average Institutional
Score (Conceito Institucional) greater or equal to “4”; |
| · | none of its post-secondary education institutions have been subject to administrative penalties by MEC in the last two years; and |
| · | the courses to be offered by the new post-secondary institution, which are limited to a maximum of five courses, must already be offered
by other institutions supported by the same supporting entity and duly recognized by MEC in the last five years with a Program Score (Conceito
de Curso) greater or equal to “4.” |
Following the initial accreditation as a post-secondary
education institution, colleges depend on an authorization issued by the MEC to offer post-secondary education courses. Within their autonomy,
universities and university centers do not depend on authorization by the MEC to create the majority of post-secondary education courses
and campuses in the same city as its headquarters, except for medicine, dentistry,
psychology, nursery and law courses, which necessarily must be previously authorized by the MEC. In any other cases, institutions are
required to inform the MEC about the programs they offer for purposes of monitoring, evaluation and further recognition.
In the authorization for post-secondary on-site courses
of the federal education system the external in loco evaluation can be waived after documentary analysis if the following requirements
are met: (i) having an Institutional Score (Conceito Institucional) greater than or equal to “3”; (ii) absence
of a supervision process; and (iii) the institution offers other courses in the same area of knowledge which meet the minimum evaluation
standards.
Requesting authorization for a course must be supported
by the following documents, among others: (i) proof of payment of the on-site evaluation fee; (ii) the PPC, outlining the number
of students, classes, description of the program and other relevant academic elements, and describing the facilities, technology and staff
for the distance learning support units, if applicable; (iii) list of faculty members, together with the relevant agreements entered
into with the education institution, together with their respective titles, working hours and work regime; and (iv) proof of availability
of the teaching facilities.
Universities and university centers may also apply for
the accreditation of a campus not located in the same city as its headquarters, provided that it is located in the same state. Such campuses
and programs must integrate the same set of universities or university centers and will only enjoy autonomous prerogatives if there is
compliance with the same headquarters requirements and if a high quality degree is shown, through an average Institutional Score (Conceito
Institucional) greater or equal to “4.” Therefore, even in the case of universities or university centers, prior authorization
from the MEC is necessary to create any courses on campuses not located in the same city as the university’s headquarters.
Once authorization for a given program has been issued,
post-secondary education institutions, including university centers and universities, must also file a request for the recognition of
the program as a condition for the national validation of the respective diploma. The requirement must be filed with MEC after the midway
point of the term established for the completion of the corresponding program and three-quarters completion of such term, and must include
the following documents, among others: (i) PPC, including the number of students, schedules and other pertinent academic information,
(ii) list of faculty members, listed in the national registry of instructors, and (iii) proof of availability of the teaching
facilities.
Authorization and recognition of courses, as well as
accreditation of post-secondary education institutions must have a limited term and be renewed periodically following the regular evaluation
process, currently established according to the evaluation cycles of the SINAES.
Our post-secondary education institutions are accredited
by the MEC and their courses are duly authorized. We also make every effort to comply with all applicable regulations to maintain our
institutions and courses compliant with MEC regulations.
Restrictions on the Authorization and Recognition of
New Medicine Courses
On April 5, 2018, MEC issued Ordinance No. 328/18, pursuant
to which, among other measures, MEC imposed a five-year suspension on the granting of authorizations for the creation of new medical education
courses. However, on April 5, 2023, MEC issued Ordinance No. 650/23, which revoked the suspension under Ordinance No. 328/18 and set new
rules for the opening of new medicine courses. In particular, MEC will be required to conduct a public call for new courses, i.e., through
the Mais Médicos program pursuant to Law No. 12,871/2013, and subject any such courses to the prior review by the Interministerial
Commission for Health Education Management (Comissão Interministerial de Gestão da Educação na Saúde).
By August 4, 2023, MEC must commence this public call and set the rules, procedures, decision-making standards and the calendar in connection
with the fulfillment of medicine course vacancies.
Modification of Supporting Entity
Pursuant to Decree No. 9,235/2017 and Ordinance No. 23/2017,
modification of a supporting entity occurs whenever there is a change in the supporting entity or its controlling shareholder, affecting
the decision-making process. Although it no longer depends on the approval of MEC, MEC must be informed within 60 days of the consummation
of the event for the purposes of updating the registration with MEC. Such notice must be followed by all the legal documents related to the alteration, duly registered and the
term of commitment executed by the legal representatives of both the current and new supporting entities.
The new supporting entity or controlling shareholder
must meet the requirements necessary for the accreditation of a post-secondary education institution, which will be assessed by MEC in
the context of the institution’s reaccreditation proceedings. Additionally, the LDB also provides that educational institutions
must inform the MEC of any change in their bylaws, which must be registered with the competent bodies.
The transfer of programs or courses between HEIs is strictly
prohibited and may subject the involved entities to penalties such as: (i) suspension of new students’ admission; (ii) suspension
of the offering of undergraduate or postgraduate lato sensu courses; (iii) suspension of the institution’s autonomy
to, among others, create new post-secondary courses and establish course curricula, if applicable; (iv) suspension of the license
to establish new distance-learning programs; (v) override any ongoing regulatory requests filed by the institution and prohibit the
filing of any new regulatory requests; (vi) suspension of the participation in the New FIES; (vii) suspension of the participation
in PROUNI; and (viii) suspension or restriction to participate in other federal educational programs.
Financing Alternatives for Students: Incentive Programs
Programs providing public funding to students enrolled
with private higher education institutions have been a major public policy to expand access to post-secondary education in Brazil, especially
for the low-income segment of the population. The most important programs are the following.
University for All Program
The University for All Program, or PROUNI is a tax incentive
program created through the Provisional Measure No. 213, of September 10, 2004, later converted into Law No. 11,096, of January 13, 2005,
that addresses the exemption of certain federal taxes imposed to post-secondary institutions that grant scholarships to low-income students
enrolled in undergraduate courses and technology graduate courses. By granting tax incentives to IES, PROUNI has played an important role
in inciting the growth and private investment in the post-secondary education sector.
Private post-secondary institutions may adhere to PROUNI
by the execution of a specific agreement with MEC, valid for 10 years and renewable for the same period. Such agreement must be emended
every semester with an additional term establishing the number of scholarships to be offered in each course, unit and class, and what
percentage of scholarships shall be granted to indigenous and afro-Brazilians. In order to participate in PROUNI, an educational institution
must:
| · | be up to date with its tax obligations; and |
| · | comply with the following requirements: (1) offer at least one full-time scholarship to every 10.7 regularly paying students
enrolled at the end of the past school year, excluding the full-time scholarships granted through PROUNI or by the institution; or (2) offer
one full-time scholarship to every 22 regularly paying students enrolled in traditional and technological graduation courses, provided
that it also offers scholarships (50% of the tuition) with a value equal to 8.5% of the paying students’ annual revenue, available
to students enrolled in traditional and technological graduation courses at the school year. |
The ratio between the number of scholarships and the
number of regularly paying students must be complied with annually. If the entity does not comply with the ratio during a school year
because of the withdrawal of students, the institution must adjust the number of scholarships in a proportionate matter for the subsequent
school year.
Pursuant to Normative Ruling No. 1,394, of September
12, 2013, issued by the Brazilian Federal Revenue Office, a post-secondary education institution that has adhered to the PROUNI is exempt,
totally or partly, from the following taxes for the duration of the adherence period:
| · | Income Tax (“IRPJ”) and Social Contribution on Net Income (“CSLL”), with respect to the net income proportionate
to the revenue derived from the Undergraduate Degree Programs and Extension courses; and |
| · | Contribution for Social Security Financing (“Cofins”) and Contribution to the Social Integration Plan (“PIS”),
with respect to the revenue derived from the traditional and technological graduation courses. |
In case a post-secondary education institution requires
its exclusion from the PROUNI, its tax incentives will be suspended from the date of the solicitation and will not be applicable for the
entire period of the basis of calculation.
Normative Ruling No. 1,394, of September 12, 2013, introduced
new provisions regarding the tax exemptions granted by PROUNI, in particular the form to calculate the extension of the benefits. According
to this Normative Ruling, in addition to the tax exemptions obtained by HEI signatories to PROUNI, tax exemptions are calculated based
on the Proportion of Effective Occupation of the Scholarships, or POEB, and the exemption related to IRPJ would be calculated without
taking into account the additional 10%.
According to Article 7, II, amended by Normative Ruling
No. 1,417, dated September 6, 2013, the calculation of the exemption also includes the additional 10% of IRPJ, in addition to the CSLL
rate. The amount calculated is the amount of the IRPJ and CSLL exemption, respectively, which may be deducted from the IRPJ and CSLL in
relation to the totality of our activities. Accordingly, with the issuance of Normative Ruling No. 1,417, of September 6, 2013, the
IRPJ / CSLL exemption on our operating income proportionate to the POEB will also include the additional 10% of IRPJ.
Moreover, considering that Normative Ruling No. 1,417,
dated September 6, 2013, creates a potential limit to the amount of the tax exemption, the application of these new provisions will result
in a reduction in value of the tax exemption obtained. Nevertheless, the legality of the provisions introduced by Normative Ruling No.
1,417, of September 6, 2013, is being discussed before the judiciary, with several motions still pending.
Other modifications of the fiscal incentive granted by
PROUNI were established by Normative Ruling No. 1,476, of July 1, 2014, which also amends the aforementioned Normative Ruling No. 1,417,
of September 6, 2013, in order to (i) exclude several amounts from the concept of profit of the holding, which impacts the enjoyment
of the exemption related to CSLL and IRPJ; and (ii) exclude the POEB from the applicable calculation, specifically for HEI with terms
of adherence to PROUNI signed up to June 26, 2011, which also affects the calculation of the exemption specifically enjoyed for the terms
of adhesion celebrated in the period prior to that date.
Student Financing Program
The Programa de Financiamento Estudantil (Student
Financing Program, or FIES), created by Law No. 10,260, of July 12, 2001, is a MEC program to finance students that cannot bear the total
costs of their education. FIES has been the most important program for the expansion of access to higher education in Brazil during the
last decade, and it is currently responsible for a significant part of the revenues of the majority of private higher education institutions.
FIES consists of funding granted by the National Fund
for Educational Development, or FNDE to students regularly enrolled in an on-site course of a post-secondary private HEI registered in
the FIES that has been positively evaluated by the MEC. After a specific selection proceeding, students may be partially or wholly funded
by FIES and, in that case, FNDE will be responsible for crediting the corresponding amount due by the student to the private higher education
institution.
Payments are made with government bonds whose primary
purpose is to compensate tax debts from the private higher education institution. In case there are no debts to be compensated, the institution
can resell the bonds to the government by means of a specific proceeding that currently occurs on monthly basis. The frequency of these
proceedings could vary according to public financial constraints and the discretion of FNDE.
FIES has been substantially reshaped by Law No 13,530,
dated December 7, 2017, and currently the program is not as broad as it used to be. According to applicable regulations, in order to enroll
students that have been selected by FIES, private higher education institutions are required to contribute to the fund 13% of the amount
due by the student to the institution as consideration for the educational services rendered in the first year of studies. This amount
is subject to change in the following years and could vary between 10% and 25% of the consideration due, depending on specific circumstances.
National Higher Education Evaluation System
The National Higher Education Evaluation System, or SINAES
was created by Law No. 10,861 of April 14, 2004, with the purpose of evaluating post-secondary education institutions, undergraduate courses
and measuring student academic performance. The main objective of this evaluation system is to assess the quality of education in the
country, providing guidelines for MEC to decide upon institutional reaccreditation, recognition and renewal of recognition of courses.
Additionally, SINAES is responsible for improving the quality of post-secondary education in Brazil given that MEC can identify deficiencies
and establish specific conditions for institutions to remedy their issues and resume their operations.
The SINAES is monitored and coordinated by the CONAES
and INEP has a very important role in all processes. The results of the evaluation of post-secondary education institutions and their
programs are public and represented on a five level scale as follows:
| · | Level 5 indicates excellent conditions; |
| · | Level 4 indicates more than satisfactory conditions; |
| · | Levels 3 indicates satisfactory conditions; and |
| · | Levels 1 and 2 indicate unsatisfactory conditions. |
Pursuant to applicable regulations, evaluation processes
consist of a preliminary assessment of several conditions relating to the institution and its courses, such as infrastructure, titles
of faculty members, work schedule of faculty members and student performance. Every year INEP establishes a method to evaluate those elements
and for them to correspond to a number in the five level scale.
The preliminary assessment is a complex process based
on quality indicators as follows:
(a) National
Student Performance Examination
The National Student Performance Examination, or ENADE,
is a test applied to a number of students that are completing courses. It evaluates students’ knowledge regarding the content provided
in the curricular guidelines of the respective undergraduate course, their skills and competencies. ENADE’s results are considered
in the composition of quality indexes for courses and institutions.
(b) Preliminary
Course Concept
The Preliminary Course Concept, or CPC, is compound of
the ENADE score, the Difference Indicator between Observed and Expected Performance, or IDD, and factors that include teacher titles,
the work schedule of faculty staff and infrastructure of the institution. It is an indicator of the state of undergraduate courses in
the country. CPC 1 and 2 courses are automatically included in the INEP examiner’s visit schedule for on-site verification of teaching
conditions. Courses with a concept equal to or greater than 3 can choose not to receive the visit of the evaluators and, thus, transform
the CPC into a permanent concept (the Course Concept). The CPC is released every year for a specific group of courses along with the results
of ENADE.
(c) General
Course Index
The General Course Index, or IGC, of the institution
summarizes in a single indicator the results of CPC and the evaluation of master’s and doctorate courses of each educational institution.
With regard to graduate courses, CAPES indexes are used and adapted to the scale according to a methodology provided by INEP, given that
they are organized in a different manner. IGC also goes from 1 to 5 and is published by INEP/MEC, after the release of the results of
ENADE and CPC. The IGC is a criterion in the accreditation and re-accreditation processes of institutions and also in the authorization
process for new courses: institutions with IGCs less than 3, for example, may have their applications for new courses rejected by the
MEC. Similarly, the indicator is used to guide the expansion of quality education: institutions with good performance are exempted from
the authorization of the MEC to open courses.
(d) Indicator
of Difference Between Observed and Expected Performance
The Indicator of Difference Between Observed and Expected
Performance, or IDD, is aimed at providing a reference of the contribution of the course to the learning of each student. For that purpose,
it compares the results of the ENADE with the performance of the same student in the ENEM. The indicator has a scale of 1 to 5.
Following preliminary assessments, all institutions are
typically subject to an on-site evaluation to confirm the results. However, given the size of the system, MEC gives institutions the option
to convert the results of the preliminary assessments into final results and, therefore, forgo on-site evaluations. For institutions that
obtain unsatisfactory levels, MEC on-site evaluations are mandatory.
Even before the on-site evaluation, MEC is entitled to
apply precautionary measures when preliminary assessments of the institution or course are not considered satisfactory, such as: (i) suspension
of new enrollments within the respective course or the entire institution; (ii) reduction of vacancies; and (iii) suspension
of all regulatory proceedings for institutional reaccreditation, new authorizations, recognitions or renewals of recognitions.
Should the level be confirmed as less than three by the
on-site evaluation, MEC may propose a term of commitment to the institution, in order for it to correct the unsatisfactory conditions
within a specific deadline. Failure to uphold, in full or in part, the conditions established in the term of commitment may result in
one or more penalties to be applied by the MEC, such as: (i) temporary suspension of the opening of a selection process of graduation
courses; (ii) disqualification from the operating authorization of the higher education institution or recognition of courses offered;
and (iii) warning, suspension or cancellation of the mandate of the officer responsible for the action not executed, in the case
of public HEI.
After the on-site evaluations, institutions and courses
obtain definitive quality concepts, as follows:
(a) Institutional
Concept, which is the result of the on-site evaluation of the institution performed by INEP; and
(b) Course Concept,
which is the result of the on-site evaluation of the course performed by INEP.
Accreditation for Postgraduate programs
Lato sensu
Post-secondary HEIs accredited for offering undergraduate
courses and that have at least one regular undergraduate course or a stricto sensu postgraduate course can offer lato sensu
postgraduate in the subjects in which they are accredited, either on-site or through distance learning.
The offering of postgraduate programs does not require
an authorization to operate, even if it is offered by a college. However, it must be notified to MEC, through MEC’s system (e-MEC),
within 60 days of the date of creation of such course.
The lato sensu postgraduate courses are aimed
at students who hold a diploma in an undergraduate course and satisfy the criteria of the institution that is offering the postgraduate
course. The postgraduate courses must meet the following requirements: (i) curriculum with a minimum study load of 360 hours; and
(ii) a teaching staff composed of at least 30% masters- or doctorate-level graduates of stricto sensu postgraduate courses.
Stricto sensu
The authorization and recognition of stricto sensu
postgraduate courses (masters and doctorates) must be evaluated by CAPES, submitted to CNE’s deliberation and approved by MEC.
The HEIs can only initiate masters and doctorate courses
activities following publication of the homologation of CNE’s favorable opinion by MEC in the Official Gazette.
As part of its analysis, CAPES must consider the general
requirements and the specific parameters of the subject area to which each course is linked. The general requirements are: (i) alignment
of the proposal with the postgraduate planning of the institution; (ii) suitability and justification of the proposal for the regional
or national development and its economic and social importance; (iii) clarity and consistency of the proposal with detailed information
on its objectives, area of concentration, lines of research, curricular structure, discipline and bibliographic references; (iv) clarity of the criteria adopted to select
the students, justifications for the profile of the aimed formation and profile of the egress; (v) proof that the teaching staff
has academic, didactic, technical and scientific competence and qualifications related to the purpose of the course; (vi) a permanent
teaching staff to ensure the regularity and quality of teaching, research and orientation activities; (vii) indication of up to five
intellectual productions of each permanent teacher; and (viii) physical and technological infrastructure of teaching and research
adequate for the development of the proposed activities.
Authorizations of new stricto sensu postgraduate
courses must be requested at specific dates, as defined by CAPES and published in the Official Gazette.
The “Mais Médicos” program
Law No. 12,871/2013, established the “Mais Médicos”
program, an initiative designed to address medical professional shortages in certain municipalities and underserved regions of Brazil
and improve healthcare infrastructure and services. This law establishes specific regulations for medical courses, including criteria
for approving the creation of new courses in Brazil involving the definition of its location, the mandatory contribution to the public
health infrastructure according to the specific categories established by Ordinance No. 16/2014 issued by MEC (i.e., training of health
professionals, building or reforming of health service structure, purchasing of medical equipment and supplies and study grant to the
medical residency program) and also the conditions for public-private partnerships to implement the course.
Within the “Mais Médicos” program,
supporting entities are no longer able to choose the location of their courses or establish all conditions of supply, which have been
transferred to MEC. The proceedings to implement a medical course, therefore, are more bureaucratic and time consuming. Basically, MEC
publishes a public auction notice to select municipalities that will receive medical courses. After this selection, it issues another
public auction notice with the criteria for private higher institutions to compete for the right to implement courses in the municipalities
previously selected.
Since its creation in 2013, the “Mais Médicos”
program has created approximately 5,430 new medical school seats and approximately 12,400 new medical residencies annually, composed of
public and private institutions. Notwithstanding this, the number of private vacancies was the lowest in Brazilian history when compared
to regimes that previously ruled the offering of medical courses from 1996-2002 and 2002-2013.
Pursuant to Ordinance No. 523/2018, enacted by MEC on
June 1, 2018, each medical school that has been granted a “Mais Médicos” program medical course authorization
or that is applying for one may file a motion with MEC requesting a maximum of 100 additional medical school seats. This right is limited
to a single motion per medical school and is subject to several requirements, including but not limited to, requirements related to the
availability of medical school infrastructure (including access to public health facilities through partnerships with the local Brazilian
Public Health System (Sistema Único de Saúde, or “SUS”) authorities), obligations to meet certain quality
assurance standards, and the absence of any penalties in the two years prior to the filing of the motion restricting medical school vacancies.
C. Organizational Structure
All of our subsidiaries are incorporated in Brazil. The
following is a chart of our current corporate structure as of the date of this annual report:
| (1) | Except for UEPC, all subsidiaries are controlled and/or wholly-owned by Afya Brazil. |
| (2) | UNINOVAFAPI refers to IESP. |
| (3) | ADMED refers to Além da Medicina. |
D. Property, Plant and Equipment
Our corporate headquarters, which
include product development, sales, marketing, and business operations, are located in Nova Lima, State of Minas Gerais. It consists of
1,425 square meters of space under two leases, both expiring in 2024.
In addition to our corporate headquarters
and as of December 31, 2022, we leased almost all of our operational, sales, and administrative facilities. We believe that our facilities
are suitable and adequate for our business as presently conducted, however, we periodically review our facility requirements and may acquire
new space to meet the needs of our business or consolidate and dispose of facilities that are no longer required.
ITEM 4A. UNRESOLVED STAFF COMMENTS
None.
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
A. Operating Results
Overview
We are the leading medical education group in Brazil
based on the number of medical school seats, as published by MEC as of December 31, 2022, delivering an end-to-end physician-centric ecosystem
that serves and empowers students to be lifelong medical learners from the moment they join us as medical students through their medical
residency preparation, graduation program, and CME.
Our innovative methodological approach combines integrated
content, interactive learning, and an adaptive experience for lifelong medical learners. Through our educational content and technology-enabled
activities, we focus on effective, personalized learning that mirrors one-on-one tutoring.
As of December 31, 2022, we had 58,200 enrolled students,
compared to 61,118 enrolled students as of December 31, 2021, representing a decrease of 4.7% for the period, and compared to 36,206 enrolled
students as of December 31, 2020, representing an increase of 68.8% for the period.
Our ability to execute our business model and strategy,
primarily through our (i) acquisitions (which represented approximately 48% of our total growth in terms of revenue in 2022, 80.5% of
our total growth in terms of revenue in 2021 and 54.0% of our total growth in terms of revenue in 2020) and (ii) organic growth (which
represented approximately 52% of our total growth in terms of revenue in 2022, 19.5% of our total growth in terms of revenue in 2021,
and 46.0% of our total growth in terms of revenue in 2020), has led to growth, profitability and cash generation.
In 2018, we were also awarded seven new undergraduate
campuses in connection with the “Mais Médicos” program, the largest number awarded to any education group, with
a total of 350 new medical school seats. The operation of such campuses is subject to the verification by MEC of the satisfactory implementation
by Afya Brazil of all regulatory requirements. As of the date of this annual report, MEC already inspected six of these campuses and already
issued the authorization to operate. Accordingly, we plan to expand our network, and expect to open an additional campus starting in 2023,
taking our total to 32 campuses in 13 Brazilian states and approximately 3,163 available medical school seats per year.
Our Growth
Our revenue growth and increased profitability have been
driven by:
| · | Maturation of current number of authorized medical school seats – Anticipated and contracted growth visibility until
2028 from new medical seats awarded to our schools, that are in the process of maturing, and new seats from our awarded campuses in connection
with the “Mais Médicos” program and which became operational in 2022; |
| · | Ability to set price – readjustment of tuition fees paid by students enrolled in our medical schools above published
inflation indexes. In 2018, we increased the tuition fees for our first-year incoming medical students, on average, by 13.0% (an increase
considerably above the 3.7% IPCA inflation rate for this same period). Since 2018, this tuition fees readjustment has applied to all new
first-year incoming students. Given that the average length of our medical courses is six years, this tuition fee readjustment will guarantee
revenue growth until 2024; |
| · | Expansion of medical residency preparation and graduate programs enrollments – Increase in number of students adopting
our digital platform, as well as partners and students enrolling in our medical graduate courses; |
| · | Deepening of relationships across lifelong medical learners base – Cross-selling opportunities such as increasing the
number of former undergraduate students subscribing to our medical residency prep solutions and the number of former undergraduate and/or
medical residency prep students applying to our graduate and CME courses; |
| · | M&A – Acquisition or investment in businesses that complement our medical education services offering. In 2022, we
acquired or invested in three companies, Além da Medicina, Cardiopapers, and Glic, which increased our Digital Services segment
by 25.0% when compared to December 31, 2021. In 2021, we acquired or invested in nine companies, UNIFIPMoc, Unigranrio and Garanhuns,
medical schools which increased our medical school seats by more than 37% when compared to December 31, 2020, and iClinic, Medicinae,
Medical Harbour, Cliquefarma, Shosp and RX PRO, digital health services companies that strengthened our digital business strategy. In
2020, we acquired or invested in six companies, UniRedentor, UniSL, FESAR and FCMPB, medical schools which increased our medical school
seats by more than 36% when compared to December 31, 2019, and PEBMED and MedPhone, digital health services companies that strengthened
our digital business strategy; and |
| · | Synergies extraction – Successful implementation of several measures to improve the profitability of recent acquisitions,
such as streamlining fee discounts and scholarship policies, integrating operations with our shared-services center; and aligning newly
acquired faculty teams with our career plan. |
Key Business Metrics
We review the following key metrics to evaluate our business,
measure our performance, identify trends affecting our business, formulate business plans and make strategic decisions:
Contribution of Medicine to Total historical undergraduate
programs combined tuition fees
We believe the metric that best demonstrates our focus
on medical education and its relevance to our products and services offering is historical undergraduate programs combined tuition fees
from medicine as a percentage of our total undergraduate programs combined tuition fees.
For the years ended December 31, 2022, 2021 and 2020,
historical undergraduate programs combined tuition fees from medicine were 77.1%, 75.9% and 73.7%, respectively, of total undergraduate
programs combined tuition fees.
Historical undergraduate programs combined tuition fees*
The following table sets forth information that was derived
from the historical operating information, for the year ended December 31, 2020, for Afya Brazil, for each of the Acquired Companies since
the date of acquisition. It does not represent revenue as disclosed in our financial statements included elsewhere in this annual report,
which are presented as the sum of (a) gross tuition fees charged to undergraduate students, (b) gross tuition fees charged to
graduate students and (c) scholarships.
|
For the Year
Ended December 31, |
|
2022 |
2022 |
2021 |
2020 |
|
(in US$ millions(1)) |
(in R$ millions) |
|
(except percentages) |
Medical school programs |
389.6 |
2,032.9 |
1,511.4 |
911.0 |
Other undergraduate health sciences programs |
64.4 |
336.2 |
239.5 |
152.5 |
Other undergraduate programs(2) |
51.0 |
266.3 |
239.2 |
173.0 |
Undergraduate programs combined tuition fees |
505.1 |
2,635.4 |
1,990.1 |
1,236.5 |
% Medicine(3) |
77.1% |
77.1% |
75.9% |
73.7% |
% Health sciences programs(4) |
12.7% |
12.7% |
88.0% |
86.0% |
| * | Historical undergraduate programs combined tuition fees is the sum equal to the total tuition fees charged to undergraduate students,
as derived from historical operating information of Afya Brazil and the Acquired Companies for the years ended December 31, 2022, 2021
and 2020. For the years ended December 31, 2022, 2021 and 2020, historical undergraduate programs combined tuition fees charged to undergraduate
students by us were R$2,635.4 million, R$1,990.1 million and R$1,236.5 million, respectively. Historical undergraduate programs combined
tuition fees does not include tuition fees we charge graduate students. We present historical undergraduate programs combined tuition
fees because, given our limited operating history and that our historical financial information and operational information included elsewhere
in this annual report may not be representative of our results and operations as a consolidated company, we believe that it may help investors
assess the past operating results of the Acquired Companies as combined with Afya Brazil. This metric also shows the percentage of revenues
we derive from our medicine and health sciences programs, which are our core business. We present historical undergraduate programs combined
tuition fees as the sum of gross tuition fees charged to undergraduate students, which differs from the tuition fees set forth in our
financial statements, which are presented as the sum of (a) gross tuition fees charged to undergraduate students, (b) gross tuition fees
charged to graduate students and (c) scholarships which are presented as the sum of gross tuition fees charged to students net of cancellations,
discounts and taxes, and which also include revenue from admission fees and income from leases, among others. The past performance of
Afya Brazil and the Acquired Companies, as reflected in the historical undergraduate programs combined tuition fees information, may not
be indicative of our future performance or any future anticipated synergies, future operating efficiencies or cost savings that may result
from these acquisitions. For further information, see “Part I—Introduction—Financial Information—Historical Undergraduate
Programs Combined Tuition Fees.” |
| (1) | For convenience purposes only, amounts in reais for the year ended December 31, 2022 have been translated to U.S. dollars using
an exchange rate of R$5.218 to US$1.00, the commercial selling rate for U.S. dollars as of December 31, 2022, as reported by the Central
Bank. These translations should not be considered representations that any such amounts have been, could have been or could be converted
at that or any other exchange rate. See “Item 3. Key Information—Selected Financial Data—Exchange Rates” for further
information about recent fluctuations in exchange rates. |
| (2) | Represents all non-health sciences undergraduate programs. |
| (3) | Calculated as medical school programs divided by the historical undergraduate programs combined tuition fees. |
| (4) | Calculated as the sum of medical school programs and other undergraduate health sciences programs, divided by the historical undergraduate
programs combined tuition fees. |
Medical School Regulatory Capacity and Capacity at Maturation
Medical school regulatory capacity and capacity at maturation
are operating metrics that provide visibility into our medical school enrollments contracted growth given the supply and demand imbalance
in the medical school market and the fact that our medical schools have historically operated very close to their regulatory capacity.
Accordingly, the gradual increase in our capacity helps explain the increase in our medical school enrollments, which in turn helps explain
our medical school enrollments contracted growth. Contracted growth refers only to schools that are in the initial six years of operation.
In addition, since the maximum number of medical seats per medical school is set by applicable regulations, the only way to grow our medical
school seats, and therefore our number of enrollments, is through acquisitions or starting new medical schools.
Medical school regulatory capacity is defined by the
number of medical schools seats available per year awarded by the MEC plus the additional seats associated with PROUNI and FIES,
multiplied by the number of years of operations since the seats were awarded, up to the sixth year of operations (maturation).
Capacity at maturation represents the maximum number of approved seats at a medical school six years after becoming operational. Our medical
schools have a six-year maturation cycle because medical school programs in Brazil are for a duration of six years. A maturation cycle
represents the period starting when a medical school commences its operations with a first year medical school class of students which
progresses through the required six years as the next classes begin behind it, and ends when the medical school has six school years of
medical students and has therefore reached capacity at maturation (i.e., the maximum number of approved seats).
For illustration, a medical school that is awarded 100
seats from the MEC has the opportunity to add up to 20 additional seats:
| · | 10 more seats by adhering to PROUNI (one seat for every 10.7 seats awarded by MEC); and |
| · | 10 more seats by adhering to FIES (10% of the seats awarded by MEC). |
Illustrative evolution of regulatory capacity per medical
school
Our medical school regulatory capacity by seats was 2,823
and 2,731 seats and our capacity at maturation was 20,325 and 17,863, as of December 31, 2022 and December 31, 2021, respectively. Assuming
our medical schools continue to operate at full capacity, we estimate reaching a total medical student base of 22,774 students by 2028.
Medical School Occupancy Rate
The occupancy rate of our medical schools is the ratio
of the number of students effectively enrolled divided by the regulatory capacity in a given period. While we believe retention rates
are an important measure of quality and customer satisfaction, we believe that occupancy rate is a more meaningful metric as it captures
not only our ability to retain students but also to find new students to compensate for eventual dropouts. Our management does not separately
measure retention rates to make decisions about our business.
The following table sets forth our medical seats occupancy
rate as of the dates indicated.
|
As of December
31, |
|
2022 |
2021 |
2020 |
Occupancy rate |
~100.0% |
~100.0% |
~100.0% |
Significant Factors Affecting Our Results of Operations
We believe that our results of operations and financial
performance will be driven by the following trends and factors:
Regulatory Environment and Mais Médicos Program
Our business is significantly influenced by the regulatory
environment of the educational industry in Brazil. We are subject to various federal laws and extensive government regulations by MEC,
CNE, INEP, FIES and CONAES, among others. In particular, medical education in Brazil is subject to regulations that aim to control the
supply of medical seats across Brazil and their geographic allocation including, but not limited to Law No. 12,871/2013, which created
the “Mais Médicos” program, whose main objectives include addressing the provision of doctors for primary care
in municipalities, strengthen health care infrastructure and allocate medical workforce to vulnerable areas.
With the increase in annual offerings through “Mais
Médicos,” on April 5, 2018, MEC issued Ordinance No. 328/18, pursuant to which, among other measures, MEC imposed a five-year
suspension on the granting of authorizations for the creation of new medical education courses. However, on April 5, 2023, MEC issued
Ordinance No. 650/23, which revoked the suspension under Ordinance No. 328/18 and set new rules for the opening of new medicine courses.
In particular, MEC will be required to conduct a public call for new courses, i.e., through the Mais Médicos program pursuant
to Law No. 12,871/2013, and subject any such courses to the prior review by the Interministerial Commission for Health Education Management
(Comissão Interministerial de Gestão da Educação na Saúde). By August 4, 2023, MEC must commence
this public call and set the rules, procedures, decision-making standards and the calendar in connection with the fulfillment of medicine
course vacancies, this will result in the creation of new medical education courses or medicine course vacancies, which will in turn increase
competition. As a result, we may be required to reduce our tuition fees or increase our operating expenses (including our costs per student)
in order to retain or attract students or to pursue new market opportunities, and reduce our ability to fill all our medical seats capacity.
In addition, although Ordinance No. 650/23 requires a
public call prior to the authorization of a new medicine course, some educational institutions have been judicially challenging this restriction
before Brazilian courts to compel MEC to receive and review requests for new medicine courses outside the Mais Médicos program
rules by alleging that these rules are an undue restriction on freedom of competition. Certain courts may ultimately compel the MEC to
receive and review these requests. For instance, Declaratory Action of Constitutionality (Ação Declaratória de
Constitucionalidade) No. 81 was filed by the Brazilian National Association of Private Universities (Associação Nacional
das Universidades Particulares) before the Brazilian Supreme Court to discuss the validity of these restrictions.
For further information, see “Item 4. Information
on the Company—Business Overview—Regulatory Overview,” “Item 3. Key Information—D. Risk Factors—Certain
Risks Relating to Our Business and Industry—The post-secondary education sector is highly regulated, and our failure to comply with
existing or future laws and regulations could significantly impact our business,” “Item 3. Key Information—D. Risk Factors—Certain
Risks Relating to Our Business and Industry—We are subject to supervision by MEC and, consequently, may suffer sanctions as a result
of non-compliance with any regulatory requirements” and “Item 3. Key Information—D. Risk Factors—We face significant
competition in each program we offer and each geographic region in which we operate. If we fail to compete efficiently, we may lose market
share and our profitability may be adversely affected.”
Scholarships, Student Financing and Tax Benefits
A large number of our students fund their tuition fees
through financing from FIES. In addition, we participate in the PROUNI scholarship program, and we benefit from tax benefits in return.
For more information on our students enrolled in these programs, see “Item 4. Information on the Company—Business Overview—Regulatory
Overview—Financing Alternatives for Students: Incentive Programs—University for All Program (PROUNI),” “Regulatory
Overview—Financing Alternatives for Students: Incentive Programs—Student Financing Program (FIES),” “Item 3. Key
Information—D. Risk Factors—Certain Risks Relating to Our Business and Industry—Changes to the rules or delays or suspension
of tuition payments made through FIES may adversely affect our cash flows and our business,” and “Item 3. Key Information—D.
Risk Factors—Certain Risks Relating to Our Business and Industry—If we lose the benefits of federal tax exemptions provided
under the PROUNI program, our business, financial condition and results of operations may be materially adversely affected.” In
addition to PROUNI and FIES, Afya participates in private financing programs through external partners (Banco Santander and Raydan) for
undergraduate students.
Brazilian Macroeconomic Environment
All of our operations are located in Brazil. As a result,
our revenues and profitability are affected by political and economic developments in Brazil and the effect that these factors have on
the availability of credit, disposable income, employment rates and average wages in Brazil. Our operations, and the industry in general,
may be affected changes in economic conditions.
Brazil is the largest economy in Latin America, as measured
by gross domestic product, or GDP. The following table shows data for real GDP, inflation and interest rates in Brazil and the U.S. dollar/real
exchange rate at the dates and for the periods indicated.
|
For the Year
Ended December 31, |
|
2022 |
2021 |
2020 |
Real growth (contraction) in gross domestic product |
2.9% |
4.6% |
(4.1)% |
Inflation (IGP-M)(1) |
5.5% |
17.8% |
23.1% |
Inflation (IPCA)(2) |
5.8% |
10.1% |
4.5% |
Long-term interest rates—TJLP (average)(3) |
7.2% |
4.8% |
4.9% |
CDI interest rate(4) |
13.7% |
9.1% |
1.9% |
Period-end exchange rate—reais per US$1.00 |
5.218 |
5.581 |
5.196 |
Average exchange rate—reais per US$1.00(5) |
5.165 |
5.412 |
5.158 |
Appreciation (depreciation) of the real vs. US$ in the period(6) |
6.5% |
(7.3)% |
(28.9%) |
Unemployment rate(7) |
7.9% |
11.1% |
13.5% |
Source: FGV, IBGE, Central Bank and Bloomberg.
| (1) | Inflation (IGP-M) is the general market price index measured by the FGV. |
| (2) | Inflation (IPCA) is a broad consumer price index measured by the IBGE. |
| (3) | TJLP is the Brazilian long-term interest rate (average of monthly rates for the period). |
| (4) | The CDI (certificado de depósito interbancário) interest rate is an average of interbank overnight rates in Brazil. |
| (5) | Average of the exchange rate on each business day of the year. |
| (6) | Comparing the US$ closing selling exchange rate as reported by the Central Bank at the end of the period’s last day with the
day immediately prior to the first day of the period discussed. |
| (7) | Average unemployment rate for the year as measured by the IBGE. |
Inflation directly affects our current operating costs
and expenses, adjusted by reference to indexes that reflect the inflation rate such as the IGP-M or IPCA, primarily as a result of annual
adjustments to faculty member and employee salaries. Historically, inflation has been more than offset by the tuition fees we charge our
students.
Our financial performance is also marginally tied to
fluctuations in interest rates, such as the CDI rate, because such fluctuations affect the value of our financial investments. We are
also exposed to fluctuations in interest rates on our accounts payable to selling shareholders which are indexed to the CDI, IPCA and
SELIC.
In addition, the COVID-19 pandemic and measures taken
in response may continue adversely impacting the Brazilian macroeconomic environment and our business. See “Item 3. Key Information—D.
Risk Factors—Certain Risks Relating to Our Business and Industry—Public health outbreaks, epidemics or pandemics, such as
the COVID-19 pandemic, have adversely affected and may continue to adversely affect our business.”
Acquisitions
We may face significant challenges in the process of
integrating the operations of our acquired companies. If we are not able to manage these integrations effectively, our results of operations
may be affected. See “Item 3. Key Information—D. Risk Factors—Certain Risks Relating to Our Business and Industry—We
may not be able to identify and acquire new medical higher education institutions or meet our strategic and financial goals in connection
with any business acquisition we seek, and difficulties in effectively integrating and managing a growing number of acquisitions may adversely
affect our strategic objectives” and “Item 4. Information on the Company—B. Business Overview—Our Recent Acquisitions.”
Business Segments
In 2021, in connection with the recent acquisitions of
digital and technology companies, the Company revised its operating segments. As result, the Company has three operating segments as opposed
to the previously reported Business Unit 1 (educational services through undergraduate and graduate courses related to medicine, other
health sciences and other undergraduate programs) and Business Unit 2 (residency preparatory courses and medical post-graduate specialization
programs, delivering printed and digital content, an online medical education platform). The three reportable segments are as follows:
| · | Undergrad, which provides educational services through undergraduate courses related to medicine, other health sciences and other
undergraduate programs; |
| · | Continuing Education, which provides specialization programs and graduate courses; and |
| · | Digital Services, which provides content and technology for medical education, clinical decisions software, practice management tools
and electronic medical records, doctor-patient relationship, telemedicine and digital prescription. |
Due to changes in operating segments, segment information
for the year ended December 31, 2020 has been restated. Segment information is presented consistently with the internal reports provided
to the our chief executive officer, who is our chief operating decision maker (CODM) and is responsible for allocating resources, assessing
the performance of our operating segments, and making our strategic decisions.
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.
Description of Principal Line Items
Revenue
Our revenue consists primarily of tuition fees we charge
for medical schools and other undergraduate and graduate programs, as well as from fees we charge for our medical residency preparatory
courses and mobile app subscription for digital medical content. We also generate revenue from
other student fees and certain education-related activities that typically trend with tuition revenues.
Cost of services
Cost of services includes expenses related to payroll,
rent, hospital agreements, utilities and depreciation and amortization. Cost of services amounted to 36.9%, 37.9% and 36.2% of our revenue
in the years ended December 31, 2022, 2021 and 2020, respectively.
Operating expenses
Our operating expenses includes expenses for personnel,
general and administrative, management and officer compensation, marketing and other income (expenses), net.
Personnel. Personnel expenses consist of wages,
overtime, benefits (meal vouchers, transportation vouchers and medical and dental insurance, among others), profit sharing, social contribution
and payroll taxes. In Brazil, social contribution and payroll taxes consist of the Brazilian Social Security Institute (Instituto Nacional
do Seguro Social) contribution, or INSS, and the Brazilian Unemployment Severance Fund (Fundo de Garantia do Tempo de Serviço)
contribution, or FGTS.
General and administrative. General and administrative
expenses mainly consist of: (i) building infrastructure expenses, such as rent and property maintenance; (ii) utilities expenses;
(iii) expenses for computer system maintenance and office automation, such as software licenses, as well as for integrated accounting,
treasury, financial planning and cost management systems; (iv) sales and marketing expenses; (v) allowance for doubtful accounts;
and (vi) amounts paid for professional services, such as consultants, auditors and outside counsel.
Other income (expenses), net. Other income (expenses),
net, consists mainly of miscellaneous income and/or expense items.
Finance result
Our finance result includes finance income and finance
expenses.
Our finance income consists mainly of income from interest
earned on financial investments and interest received on late payments from students. Our finance expenses consist mainly of interest
expenses from accounts payable to selling shareholders, loans and lease liabilities, foreign exchange associated with our cash in US Dollars
and banking fees.
We also have cash and cash equivalents denominated in
U.S. dollars, and accordingly, we have foreign exchange gain or losses from the changes in U.S. dollars against the Brazilian real.
Income taxes expenses
Income taxes expenses includes current income taxes and
social contribution.
Historical Consolidated Results of Operations
Year Ended December 31, 2022 Compared to the year ended December
31, 2021
The following table sets forth our historical consolidated
income statement data for the years ended December 31, 2022 and 2021:
|
For the Year
Ended December 31, |
|
2022 |
2021 |
Variation (%) |
|
(in R$ millions, except for percentages) |
Revenue |
2,329.1 |
1,719.4 |
35.5% |
Cost of services |
(859.6) |
(652.3) |
31.8% |
Gross profit |
1,469.5 |
1,067.1 |
37.7% |
General and administrative expenses |
(798.2) |
(622.6) |
28.2% |
Other expenses, net |
(7.3) |
(3.6) |
101.4% |
Operating income |
664.0 |
440.9 |
50.6% |
Finance income |
102.0 |
64.6 |
58.0% |
Finance expenses |
(349.9) |
(243.8) |
43.5% |
Finance result |
(247.9) |
(179.2) |
38.3% |
Share of income of associate |
12.2 |
11.8 |
3.3% |
Income before income taxes |
428.3 |
273.5 |
56.6% |
Income taxes expenses |
(35.7) |
(31.2) |
14.3% |
Net income |
392.6 |
242.3 |
62.0% |
Revenue
Revenue for the year ended December 31, 2022 was R$2,329.1
million, an increase of R$609.7 million, or 35.5%, from R$1,719.4 million for the year ended December 31, 2021. On a per segment basis,
our revenue was primarily affected by the following:
| · | In our Undergrad segment, revenue for the year ended December 31, 2022 was R$2,037.9 million, an increase
of 36.0%, or R$539.5 million, from R$1,498.4 million for the year ended December 31, 2021. This increase was primarily attributable to:
(i) organic revenue growth of 18.6%, mainly due to the maturation of medical school seats and an increase of 9.1% in the average ticket
of Medical programs, from an average ticket of R$8,615 in 2021 compared to R$9,400 in 2022; and (ii) the consolidation of the results
of four Mais Medicos campuses opened in the third quarter of 2022 (Abaetetuba, Itacoatiara, Bragança
and Manacapuru), resulting in an increase of R$9.2 million in our Undergrad segment’s revenue in 2022; |
| · | In our Continuing Education segment, revenue for the year ended December 31, 2022 was R$108.8 million,
an increase of 49.1%, or R$35.8 million, from R$73.0 million for the year ended December 31, 2021. This increase was primarily attributable
to a 34.2% increase in active paying students (from 3,189 active paying students in 2021 compared to 4,280 active paying students in 2022),
primarily because of segment recovery after in-person activities were resumed with the winding down of the COVID-19 pandemic; and |
| · | In our Digital Services segment, revenue for the year ended December 31, 2022 was R$190.0 million, an
increase of 25.0%, or R$38.0 million, from R$152.0 million for the year ended December 31, 2021. This increase was primarily attributable
to: (i) the consolidation of the results of operations of acquired companies in 2022 (Além da Medicina, Cardiopapers and Glic),
resulting in an increase of R$23.2 million in our Digital Services segment’s revenue in 2022; and (ii) organic growth as a result
of a combination of (a) a positive start to B2B engagements, which reached roughly 100 contracts—including pharma solutions and
RX PRO contracts—with 45 different pharmaceutical industry companies, resulting in an increase of R$14.3 million in our Digital
Services segment’s revenue in 2022, and (b) the expansion of the active payers in our B2P business, mainly by Whitebook, iClinic,
and Shosp, as offset in part by the lower performance of Medcel due to greater competition in the Residency Preparatory market resulting
in an increase of R$0.5 million in our Digital Services segment’s revenue in 2022. |
Cost of services
Cost of services for the year ended December 31, 2022
was R$859.6 million, an increase of R$207.3 million, or 31.8%, from R$652.3 million for the year ended December 31, 2021. As a percentage
of revenue, our cost of services decreased to 36.9% for the year ended December 31, 2022, compared to 37.9% for the year ended December
31, 2021. On a per segment basis, our cost of services was primarily affected by the following:
| · | In our Undergrad segment, cost of services for the year ended December 31, 2022 was R$763.2 million, an
increase of R$208.2 million, or 37.5%, from R$555.0 million for the year ended December 31, 2021. This increase was primarily attributable
to (i) the consolidation of the results of operations for the year ended December 31, 2022 of companies acquired in 2021 (UnifipMoc and
Unigranrio), resulting in an increase of R$99.2 million in our Undergrad segment’s
cost of services; (ii) an increase of R$56.6 million applied to salaries; (iii) an increase of R$17.9 million applied to hospital
and medical agreements; and (iv) an increase of R$34.5 million in other costs in our Undergrad segment in 2022; |
| · | In our Continuing Education segment, cost of services for the year ended December 31, 2022 was R$56.6
million, an increase of R$5.8 million, or 11.4%, from R$50.8 million for the year ended December 31, 2021. This increase was primarily
attributable to: (i) R$5.3 million in costs associated with the opening of new IPEMED units in 2022; and (ii) an increase of R$0.3 million
applied to salaries in our Continuing Education segment in the year ended December 31, 2022. |
| · | In our Digital Services segment, cost of services for the year ended December 31, 2022 was R$47.4 million,
a decrease of R$3.1 million, or 6.1%, from R$50.5 million for the year ended December 31, 2021. This decrease was primarily attributable
to: cost reductions in the amount of R$8.1 million in our Medcel operations. |
Gross profit
As a result of the foregoing, gross profit for the year
ended December 31, 2022 was R$1,469.5 million, an increase of R$402.4 million, or 37.7%, from R$1,067.1 million for the year ended December
31, 2021. On a per segment basis, our gross profit was the following:
| · | In our Undergrad segment, gross profit for the year ended December 31, 2022 was R$1,274.7 million, an
increase of R$331.3 million, or 35.1%, from R$943.4 million for the year ended December 31, 2021; |
| · | In our Continuing Education segment, gross profit for the year ended December 31, 2022 was R$52.3 million,
an increase of R$30.0 million, or 135.3%, from R$22.2 million for the year ended December 31, 2021; and |
| · | In our Digital Services segment, gross profit for the year ended December 31, 2022 was R$142.5 million,
an increase of R$41.1 million, or 40.5%, from R$101.5 million for the year ended December 31, 2021. |
General and administrative expenses
General and administrative expenses for the year ended
December 31, 2022 was R$798.2 million, an increase of R$175.5 million, or 28.2%, from R$622.6 million for the year ended December 31,
2021. This increase was primarily attributable to: (i) the consolidation of the results of operations of acquired companies in 2022
(Além da Medicina, CardioPapers and Glic), resulting in an increase of R$19.7 million in our general and administrative expenses
in 2022; (ii) an increase of R$29.3 million in maintenance expenses, from R$47.1 million for the year ended December 31, 2021 to R$76.4
million for the year ended December 31, 2022, primarily in connection with improvements relating to the regular operations of companies
acquired in the period; (iii) an increase of R$8.7 million in sales and marketing, from R$39.5 million for the year ended December 31,
2021 to R$48.2 million for the year ended December 31, 2022, also mostly related to advertising expenses of companies acquired in the
period; and (iv) an increase of R$81.4 million in payroll expenses, from R$248.1 million for the year ended December 31, 2021 to R$329.5
million for the year ended December 31, 2022.
Operating income
For the reasons discussed above, operating income for
the year ended December 31, 2022 was R$664.0 million, an increase of R$223.1 million, or 50.6%, from R$440.9 million for the year ended
December 31, 2021.
Finance result
Finance result for the year ended December 31, 2022 was
a net finance expense of R$247.9 million, compared to a net finance expense of R$179.2 million for the year ended December 31, 2021, for
the reasons described below.
Finance income. Finance income for the year ended
December 31, 2022 was R$102.0 million, an increase of R$37.5 million, from R$64.6 million for the year ended December 31, 2021. This increase
was primarily attributable to (i) an increase in interest received of R$4.2 million, and (ii) an increase in income from financial
investments of R$32.0 million.
Finance expenses. Finance expenses for the year
ended December 31, 2022 was R$349.9 million, an increase of R$106.1 million, from R$243.8 million for the year ended December 31, 2021.
This increase was primarily attributable to (i) an increase in interest expenses on lease liabilities of R$21.4 million, as a result of
the companies acquired and new lease agreements in the period, (ii) an increase in interest expense of R$91.6 million, mainly as a result
of interest rates in Brazil during 2022 and the maturation of our convertible preferred shares; and (iii) a decrease in foreign exchange
loss of R$17.1 million in 2022, as a result of favorable foreign exchange impacts on our cash and banks in the period.
Income before income taxes
As a result of the foregoing, income before income taxes
for the year ended December 31, 2022 was R$428.3 million, an increase of R$154.8 million, or 56.6%, from R$273.5 million for the year
ended December 31, 2021.
Income taxes expenses
Income taxes expenses for the year ended December 31,
2022 was R$35.7 million, an increase of R$4.5 million, from R$31.2 million for the year ended December 31, 2021, and the effective tax
rate decreased from 11.4% for the year ended December 31, 2021, to 8.3% for the ended year December 31, 2022. This decrease in our effective
tax rate was primarily attributable to: (i) the decrease of the tax effect on losses from Afya Limited, an entity not subject to taxation,
from 13.8% of our income before income taxes to 7.7% of our income before income taxes, and (ii) the decrease in our unrecognized deferred
tax assets from 31.5% of our income before income taxes to 27.4% of our income before income taxes.
Net income
As a result of the foregoing, our net income for the
year ended December 31, 2022 was R$392.6 million, an increase of R$150.3 million, or 62.0%, from R$242.3 million for the year ended December
31, 2021.
Year Ended December 31, 2021 Compared to the Year Ended December
31, 2020
Revenue
Revenue for the year ended December
31, 2021 was R$1,719.4 million, an increase of R$518.2 million, or 43.1%, from R$1,201.2 million for the year ended December 31, 2020.
On a per segment basis, our revenue was primarily affected by the following:
| · | In our Undergrad segment, revenue for the year ended December 31, 2021 was R$1,498.4 million, an increase
of 49.5%, or R$495.9 million, from R$1,002.5 million for the year ended December 31, 2020. This increase was primarily attributable to:
(i) organic revenue growth of 13.4%, mainly due to the maturation of medical school seats and an increase of 6.8% in the average ticket
of Medical programs, from an average ticket of R$8,065 in 2020 compared to R$8,615 in 2021, resulting in an increase of R$133.9 million
in our Undergrad segment’s revenue in 2021; and (ii) consolidation of the results of operations of acquired companies in 2021
(UNIFIPMoc and Unigranrio) including two Mais Medicos campuses opened at the end of 2020 (Santa
Ines and Cruzeiro do Sul), resulting in an increase of R$209.3 million in our Undergrad segment’s revenue; |
| · | In our Continuing Education segment, revenue for the year ended December 31, 2021 was R$73.0 million,
a decrease of 31.9%, or R$34.2 million, from R$107.2 million for the year ended December 31, 2020. This decrease was primarily attributable
to a 23.7% reduction in active paying students (from 4,181 active paying students in 2020 compared to 3,189 active paying students in
2021), primarily because of: (i) in-person practical programs that have not been offered since the first half of 2020; and (ii) physicians’
decision to postpone admission to specialization courses due to the COVID-19 pandemic; and |
| · | In our Digital Services segment, revenue for the year ended December 31, 2021 was R$147.9 million,
an increase of 61.6%, or R$56.4 million, from R$91.5 million for the year ended December 31, 2020. This increase was primarily
attributable to: (i) the consolidation of the results of operations of acquired companies in 2021 (iClinic, Medicinae, Medical
Harbour, Cliquefarma, Shosp and RX Pro), resulting in an increase of R$22.8 million in our Digital Services segment’s revenue
in 2021; and (ii) the fact that PEBMED had consolidated 12 months of revenue in 2021, against approximately five months of revenue
in 2020, as the PEBMED acquisition was closed in July 2020, resulting
in an increase of R$38.5 million in our Digital Services segment’s revenue in 2021. |
Cost of services
Cost of services for the year ended
December 31, 2021 was R$652.3 million, an increase of R$217.6 million, or 50.1%, from R$434.7 million for the year ended December 31,
2020. As a percentage of revenue, our cost of services increased to 37.9% for the year ended December 31, 2021, compared to 36.2% for
the year ended December 31, 2020. On a per segment basis, our cost of services was primarily affected by inflation during the period and
by the following:
| · | In our Undergrad segment, cost of services for the year ended December 31, 2021 was R$555.0 million, an
increase of R$173.0 million, or 45.3%, from R$382.0 million for the year ended December 31, 2020. This increase was primarily attributable
to (i) the consolidation of the results of operations of acquired companies in 2021 (UNIFIPMoc and Unigranrio), resulting in an increase
of R$86.1 million in our Undergrad segment’s cost of services; (ii) an increase of R$17.4 million in 2021 in severance and
other costs associated with downsizing teaching staff at some of our recently acquired units in order for us to benefit from synergies;
and (iii) an increase of R$121.8 million applied to salaries in our Undergrad segment in 2021; |
| · | In our Continuing Education segment, cost of services for the year ended December 31, 2021 was R$50.8
million, an increase of R$10.8 million, or 27%, from R$40.0 million for the year ended December 31, 2020. This increase was primarily
attributable to: (i) R$5.6 million in costs associated with opening six new IPEMED units in 2021; and (ii) an increase of R$0.9 million
applied to salaries in our Continuing Education segment in 2021; and |
| · | In our Digital Services segment, cost of services for the year ended December 31, 2021 was R$50.5 million,
an increase of R$36.2 million, or 253.1%, from R$14.3 million for the year ended December 31, 2020. This increase was primarily attributable
to: (i) the consolidation of the results of operations of acquired companies in 2021 (iClinic, Medicinae, Medical Harbour, Cliquefarma,
Shosp and RX Pro), resulting in an increase of R$11.8 million in our Digital Services segment’s cost of services; (ii) the fact
that PEBMED had consolidated 12 months of cost of services in 2021, against approximately five months of cost of services in 2020, resulting
in an increase of R$5.2 million in our Digital Services segment’s cost of services; and (iii) an increase of R$5.6 million applied
to salaries in our Digital Services segment in 2021. |
Gross profit
As a result of the foregoing, gross
profit for the year ended December 31, 2021 was R$1,067.1 million, an increase of R$300.5 million, or 39.2%, from R$766.5 million for
the year ended December 31, 2020. On a per segment basis, our gross profit was the following:
| · | In our Undergrad segment, gross profit for the year ended December 31, 2021 was R$943.4 million, an increase
of R$322.9 million, or 52.0%, from R$620.5 million for the year ended December 31, 2020; |
| · | In our Continuing Education segment, gross profit for the year ended December 31, 2021 was R$22.2 million,
a decrease of R$45.0 million, or 67.0%, from R$67.2 million for the year ended December 31, 2020; and |
| · | In our Digital Services segment, gross profit for the year ended December 31, 2021 was R$101.5 million,
an increase of R$22.6 million, or 28.7%, from R$78.8 million for the year ended December 31, 2020. |
General and administrative expenses
General and administrative expenses
for the year ended December 31, 2021 was R$622.6 million, an increase of R$219.7 million, or 54.6%, from R$402.9 million for the year
ended December 31, 2020. This increase was primarily attributable to: (i) the consolidation of the results of operations of acquired
companies in 2021 (iClinic, Medicinae, Medical Harbour, Cliquefarma, Shosp, UNIFIPMoc, Unigranrio and RX Pro), resulting in an increase
of R$65.8 million in our general and administrative expenses in 2021; (ii) an increase of R$26.4 million in maintenance expenses, from
R$20.7 million for the year ended December 31, 2020 to R$47.1 million for the year ended December 31, 2021, primarily in connection with
improvements to companies acquired in the period; (iii) an increase of R$21.2 million in sales and marketing, from R$18.3 million for
the year ended December 31, 2020 to R$39.5 million for the year ended December 31, 2021, also mostly related to advertising
expenses of companies acquired in the period; and (iv) an increase of R$102.8 million in payroll expenses, from R$130.8 million for the
year ended December 31, 2020 to R$233.6 million for the year ended December 31, 2021.
Operating income
For the reasons discussed above,
operating income for the year ended December 31, 2021 was R$440.9 million, an increase of R$77.6 million, or 21.3%, from R$363.3 million
for the year ended December 31, 2020.
Finance result
Finance result for the year ended
December 31, 2021 was a net finance expense of R$179.2 million, compared to a net finance expense of R$36.0 million for the year ended
December 31, 2020, for the reasons described below.
Finance income. Finance income
for the year ended December 31, 2021 was R$64.6 million, an increase of R$2.3 million, from R$62.3 million for the year ended December
31, 2020. This increase was primarily attributable to (i) an increase in interest received of R$11.2 million (ii) an increase in
income from financial investments of R$11.3 million, and (iii) no amount in 2021 related to changes in fair value of derivative instruments,
since the Company did not have any derivative instruments in 2021, compared to a decrease of R$20.7 million in 2020 related to changes
in fair value of derivative instruments.
Finance expenses. Finance
expenses for the year ended December 31, 2021 was R$243.8 million, an increase of R$145.5 million, from R$98.3 million for the year ended
December 31, 2020. This increase was primarily attributable to (i) an increase in interest expenses on lease liabilities of R$22.8 million,
as a result of the companies acquired and new lease agreements in the period (ii) an increase in interest expense of R$82.9 million mainly
by net debt resulting from the acquisitions in 2021 (accounts payable to selling shareholders, loans and financing, including perpetual
convertible preferred shares); and (iii) an increase in foreign exchange loss of R$13.3 million in 2021, as a result of adverse foreign
exchange impacts on our cash and banks in the period.
Income before income taxes
As a result of the foregoing, income
before income taxes for the year ended December 31, 2021 was R$273.5 million, a decrease of R$61.5 million, or 18.4%, from R$335.0 million
for the year ended December 31, 2020.
Income taxes expenses
Income taxes expenses for the year
ended December 31, 2021 was R$31.2 million, an increase of R$4.1 million, from R$27.1 million for the year ended December 31, 2020, and
our effective tax rate increased from 8.1% for the year ended December 31, 2020, to 11.4% for the ended year December 31, 2021. Despite
our PROUNI incentives, this increase was primarily attributable to: (i) the increase of R$2.0 million in our taxable income as a result
of the positive impact of our organic growth; (ii) the consolidation of the results of operations of acquired companies in 2021 (iClinic,
Medicinae, Medical Harbour, Cliquefarma, Shosp, UNIFIPMoc, Unigranrio and RX Pro) during the course of 2021, resulting in an increase
in income tax expense of R$2.1 million in the period; and (iii) presumed profit (lucro presumido) taxation regime applicable to
Medcel and PEBMED.
Net income
As a result of the foregoing, our
net income for the year ended December 31, 2021 was R$242.3 million, a decrease of R$65.6 million, or 21.3%, from R$307.9 million for
the year ended December 31, 2020.
Critical Accounting Estimates and Assumptions
Our consolidated financial statements are prepared in
conformity with IFRS. In preparing our audited consolidated financial statements, we make assumptions, judgments and estimates that can
have a significant impact on amounts reported in our consolidated financial statements. We base our assumptions, judgments and estimates
on historical experience and various other factors that we believe to be reasonable under the circumstances. Actual results could differ
materially from these estimates under different assumptions or conditions. We regularly reevaluate our assumptions, judgments and estimates.
Our significant accounting policies are described in note 2 and our critical accounting estimates and assumptions are described in note
3 to our audited consolidated financial statements included elsewhere in this annual report.
Recent Accounting Pronouncements
The new amendments and interpretations that were applied
for the first time in 2022 did not have a significant impact on our consolidated financial statements.
B. Liquidity and Capital Resources
As of December 31, 2022, we had R$1,093 million in cash
and cash equivalents. We believe that our current available cash and cash equivalents and the cash flows from our operating activities
will be sufficient to meet our working capital requirements and capital expenditures in the ordinary course of business for the next 12
months. Future cash needs in the short and long term will be funded by our operating cash flow and from funds raised in the debt or equity
capital markets.
The following table shows the historical cash flows for
the years ended December 31, 2022, 2021 and 2020:
|
For the Year
Ended December 31, |
|
2022 |
2021 |
2020 |
|
(in R$ millions) |
Cash Flow Data |
|
|
|
Net cash flows from operating activities |
843.9 |
630.9 |
371.5 |
Net cash flows used in investing activities |
(591.5) |
(1,274.1) |
(1,042.8) |
Net cash flows from financing activities |
92.9 |
364.7 |
756.4 |
Operating Activities
We had net cash flows from operating activities of R$843.9
million in 2022, as compared to R$630.9 million in 2021, mainly due to the maturation of medical seats, an increase in the average ticket
of medical programs and consolidation of acquisitions of medical schools and digital services. The main variations in our operating assets
and liabilities were: (i) a growth in our operation result from R$273.4 million as of December 31, 2021 to R$428.3 million as of December
31, 2022, which, in turn, led to an increase in trade receivables from R$79.7 million as of December 31, 2022 to R$129.1 million as of
December 31, 2021, which was affected by a growth of our revenue from R$1,719.4 million for the year ended December 31, 2021 to R$2,329.1
million for the year ended December 31, 2022, mainly due to better economic environment in our locations and acquisitions.
Investing Activities
We had net cash flows used in investing activities of
R$591.5 million in 2022, as compared to net cash flows used in investing activities of R$1,274.0 million in 2021. The main variations
in our investing activities were: (i) a decrease of acquisition of subsidiaries, net of cash acquired, of R$715.9 million from R$1,017.1
million to R$301.2 million as result of the relevance of consideration transferred for the acquired entities in 2021 compared to the acquired
entities in 2022; and (ii) decrease in acquisition of intangible assets from R$150.9 million as of December 31, 2021 to R$128.9 million
as of December 31, 2022 related to the Garanhuns acquisition and educational platform/software development.
Financing Activities
We had net cash flows from financing activities of R$92.9
million in 2022, as compared to R$364.7 million in 2021, mainly due to a decrease of R$312.7 million in new loans contracted in 2022 when
compared to 2021.
For a discussion of changes in our consolidated cash
flows in the year ended December 31, 2021 compared to the year ended December 31, 2020, see our annual report on Form 20-F for the fiscal
year ended December 31, 2021, filed with the SEC on April 29, 2022.
Liquidity
Our management has responsibility for monitoring liquidity
risk. In order to achieve the Company’s objective, our management regularly reviews the risk and maintains appropriate reserves,
including bank credit facilities with first tier financial institutions. Our management also continuously monitors projected and actual
cash flows and the combination of the maturity profiles of the financial assets and liabilities.
The main requirements for financial resources used by
the Company arise from the need to make payments for suppliers, operating expenses, labor and social obligations, loans and financing
and accounts payable to selling shareholders.
Our total liquidity, which we calculate as the sum of
cash and cash equivalents, increased by 46%, from R$748.6 million as of December 31, 2021 to R$1,093.1 million as of December 31, 2022.
Indebtedness
As of December 31, 2022, we had outstanding debt, comprised
of our loans and financings, in the aggregate amount of R$1,882.9 million. The following table summarizes our loans and financings as
of December 31, 2022 and 2021:
Financial institution |
Currency |
Interest rate |
Maturity |
2022 |
2021 |
|
(in R$ thousands) |
Banco Itaú Unibanco S.A. |
Brazilian real |
CDI + 1.90% p.y. |
2025 |
518,134 |
510,972 |
FINEP |
Brazilian real |
TJLP p.y. |
2027 |
8,418 |
10,145 |
Banco Itaú Unibanco S.A. |
Brazilian real |
CDI + 1.75% p.y. |
2024 |
32,252 |
31,199 |
Softbank |
Brazilian real |
6.5% p.y. |
2026 |
824,258 |
822,560 |
Debentures |
Brazilian real |
CDI + 1.80% p.y. |
2028 |
499,839 |
— |
Total Loans and Financing |
|
|
|
1,882,901 |
1,374,876 |
Current |
|
|
|
145,202 |
128,720 |
Non-current |
|
|
|
1,737,699 |
1,246,156 |
Loans
On October 1, 2020 (as amended on September 28, 2022),
Afya Brazil entered into a loan with Banco Itaú Unibanco S.A. in the principal amount of R$500.0 million. The loan incurs interest
at the CDI rate plus 1.62% per year, through September 28, 2022, and 1.90% per year, as of September 28, 2022. The loan is repayable
in three installments in October 2023, April 2024 and October 2025.
On July 23, 2019, Medcel entered into a loan of R$16.2
million 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), and maturity in 2027. The first and second tranches of R$6.7 million
and R$4.1 million, respectively, were drawn down in October 2019 and December 2020, respectively, in order to develop the Medical web
series and other digital content. There are no financial covenants under this agreement. The total loan balance is guaranteed by a bank
warranty.
On October 28, 2020, UNIFIPmoc entered into a loan with
Banco Itaú Unibanco S.A. in the amount of R$30.0 million. On June 30, 2021 this agreement was amended and is now adjusted by the
CDI rate plus an interest rate of 1.75% per year and is repayable in three installments in July 2023, January 2024 and July 2024.
Debentures
On December 16, 2022, Afya announced the closing of the
issuance, through its wholly-owned subsidiary Afya Brazil, of 500,000 simple, non-convertible, unsecured debentures in a single series,
each with a par value of R$1.00, totaling an aggregate amount of R$500.0 million, by means of a public distribution with restricted placement
efforts in the Brazilian market, under the terms of the Brazilian Securities and Exchange Commission (Comissão de Valores Mobiliários)
Rule No. 476. Afya expects to use the proceeds of the offering for general corporate purposes, strengthening its cash position, and extending
its debt maturity profile. The debentures were issued with a maturity date of January 15, 2028, with the principal to be amortized in
two equal installments payable on January 15, 2027 and January 15, 2028, corresponding to the fourth and fifth years of the
transaction, respectively. The debentures bear interest at 100% of the CDI rate plus 1.80% per year, payable semi-annually on January
15 and July 15 of each year, until the maturity date.
The debentures are subject to certain obligations including
financial covenants. Under the terms of the debentures, we are required to maintain a net debt (excluding our Series A perpetual convertible
preferred shares and our lease liabilities) to Adjusted EBITDA ratio of below or equal to 3.0x, as of the end of each fiscal year, until
the maturity date. Adjusted EBITDA considers, for purposes of this ratio, is calculated as net income plus (i) income taxes expenses,
(ii) net financial result (excluding interest expenses on lease liabilities), (iii) depreciation and amortization expenses (excluding
right-of-use depreciation expenses), (iv) share-based compensation expenses, (v) share of income of associate, (vi) interest received
and (vii) non-recurring expenses. As of December 31, 2022, we were in compliance with all obligations set forth under the terms of the
debentures.
Series A Perpetual Convertible Shares
On April 26, 2021, the Company issued and sold 150,000
shares of perpetual convertible preferred shares designated as Series A perpetual convertible preferred shares, with a par value of U.S.$0.00005
per share of the Company for US$150.0 million, equivalent to R$821.8 million, on the issuance date. The Series A perpetual convertible
preferred shares is a class of equity security that ranks senior to the common shares with respect to dividend rights or rights upon liquidation.
Each Series A perpetual convertible preferred share is
entitled to a cash dividend of 6.5% per annum and is convertible, at the holder’s discretion, into the Company’s Class A common
shares at an initial conversion price of US$25.35. The Company may require the conversion of any or all of the Series A perpetual convertible
preferred shares at any time on or after the three-year anniversary of the original issuance date if certain conditions set forth in the
certificate of designation are met (if for 20 out of 30 consecutive trading days prior, Afya’s stock price is equal or above 150%
of the conversion rate). The Company may also redeem any or all of the Series A perpetual convertible preferred shares for cash, shares
of its common shares or a combination thereof at its election, at any time on or after the seven-year anniversary of the original issuance
date as determined in the certificate of designation. On or after the five-year anniversary of the original issuance date, the holders
of the Series A perpetual convertible preferred shares shall have the right to redeem all of the outstanding Series A perpetual convertible
preferred shares for cash, the Company’s common shares or a combination thereof (at the Company’s election, subject to certain
conditions) to be determined in the certificate of designation. Upon the occurrence of a change of control, the holders will have the
right to redeem their Series A perpetual convertible preferred shares for cash at a price set forth in the certificate of designation.
The Series A perpetual convertible preferred shares will be entitled to the same voting rights as the common shares only when converted
into common shares.
The Company determined that the Series A perpetual convertible
preferred shares should be classified as a financial liability at amortized cost upon their issuance since they are redeemable primarily
according to the decision of the holder and there is a contractual obligation to deliver assets (cash, common shares or a combination
thereof) that could not be avoided by the Company in an event of redemption. The financial liability is denominated in Brazilian Reais
and thus not subject to foreign exchange changes. In addition, as the entire instrument is classified as a liability, the embedded put
option to redeem the Series A perpetual convertible preferred shares for cash is an embedded derivative. The embedded derivative will
not be treated separately once the exercise price of the option is closely related to the host contract.
The initial transaction costs that are directly attributable
to the issuance of Series A perpetual convertible preferred shares were measured at fair value together with the financial liability on
initial measurement. The transaction costs totaled R$13.0 million, including legal counsels and advisors.
For further information on our loans and financing, see
note 13.2.1 to the audited consolidated financial statements, included elsewhere in this annual report.
Share Buyback Program
For further information on our share buyback program,
see note 17 (e) to the audited consolidated financial statements, included elsewhere in this annual report, Exhibit 2.1, “Description
of Securities Registered Under Section 12 of the Exchange Act - Share Repurchases” and “Item
16E. Purchases Of Equity Securities By The Issuer And Affiliated Purchasers.”
Tabular Disclosure of Contractual Obligations
The following is a summary of our contractual obligations,
based on contractual undiscounted amounts, as of December 31, 2022:
|
Payments Due
by Period as of December 31, 2022 |
|
Total |
Less than
1 year |
1 – 3 years |
3 – 5 years |
More than
5 years |
|
(in R$ thousands) |
Trade payables |
71,482 |
71,482 |
— |
— |
— |
Loans and financing (1) |
2,313,530 |
287,741 |
788,190 |
1,237,599 |
— |
Lease liabilities |
1,711,092 |
117,506 |
234,688 |
219,127 |
1,139,771 |
Accounts payable to selling shareholders |
621,762 |
282,481 |
339,281 |
— |
— |
Notes payable |
62,176 |
62,176 |
— |
— |
— |
Advances from customers |
133,050 |
133,050 |
— |
— |
— |
Total |
4,913,092 |
954,436 |
1,362,159 |
1,456,726 |
1,139,771 |
| (1) | Loans and financing includes the obligations related to our Series A perpetual convertible preferred shares discussed in note 13.2.1(d)
to our audited consolidated financial statements included elsewhere in this annual report. |
Future cash needs in the short and long term will
be funded by our operating cash flow and from proceeds raised in the debt or equity capital markets.
As of December 31, 2022, we did not have any off-balance
sheet arrangements.
Principal Capital Expenditures
We made capital
expenditures (consisting of purchase of property and equipment and intangible assets) of R$297.0 million, R$276.8 million and R$137.6
million in 2022, 2021 and 2020, respectively. During these years, our capital expenditures mainly included expenditures related to the
expansion and maintenance of our campuses and headquarters including leasehold improvements, the integration of our acquisitions, the
implementation of our shared services center, and the development of the project that led to the certification of seven new greenfield
medical schools as part of the “Mais Médicos” program.
For 2023, we have
budgeted capital expenditures of R$225.6 million, mostly to support the growth in our business and operations. We expect to meet our capital
expenditure needs for the foreseeable future from our operating cash flow and our existing cash and cash equivalents. Our future capital
requirements may be adjusted from time to time as they depend on several factors, including our growth rate, the expansion of our research
and development efforts, employee headcount, marketing and sales activities, the introduction of new features to our existing products,
the continued market acceptance of our products. See “Item 3. Key Information—D. Risk Factors—Certain Risks Relating
to Our Business and Industry—Public health outbreaks, epidemics or pandemics, such as the COVID-19 pandemic, have adversely affected
and may continue to adversely affect our business.”
C. Research and Development,
Patents and Licenses
As of the date of this annual report, we had no issued
patents and one patent application pending in Brazil. As of December 31, 2022, we are party to 337 agreements, with third-party authors
with respect to educational content. As of December 31, 2022, we owned 299 trademark registrations in Brazil, and we have also sought
to register six trademarks abroad, in the United States and in the European Union. As of the date of this annual report, we have 129 pending
trademark applications in Brazil and unregistered trademarks that we use to promote our brand, and also own 297 registered domain names
in Brazil.
See “Item 4. Information on the Company—D.
Property, plant and equipment—Technology and Intellectual Property.”
D. Trend Information
On March 11, 2020, the World Health Organization declared
COVID-19 a pandemic, and on March 20, 2020 the Brazilian federal government declared a national emergency with respect to COVID-19. The
impact on our operations still is highly uncertain and cannot be predicted with confidence. The spread of COVID-19, or actions taken to
mitigate this spread, could have material and adverse effects on our ability to operate effectively, including as a result of the complete
or partial closure of facilities or labor shortages. The extent of the adverse impact on our operations, including, among others, the
regular functioning of our facilities, will depend on the extent and severity of the continued spread of the coronavirus in Brazil. Since
March 17, 2020, there has been an interruption of our on-campus activities in light of authorities imposed lockdowns, with a significant
portion of our non-practical educational activities being temporarily offered through our online platform (rather than on-site) and the
calendar of our practical educational activities being rescheduled to when authorities allow on-campus activities to resume. By the date
of issuance of this annual report, all of the lockdown restrictions have been revoked by Brazilian authorities in our campus locations
and we have also successfully resumed all of our practical classes in medicines courses and all of our classroom classes.
For further information “Item 3. Key Information—D.
Risk Factors—Certain Risks Relating to Our Business and Industry—Public health outbreaks, epidemics or pandemics, such as
the COVID-19 pandemic, have adversely affected and may continue to adversely affect our business.”
Other than as disclosed elsewhere in this annual report,
we are not aware of any other trends, uncertainties, demands, commitments or events for the year ended December 31, 2022 that are reasonably
likely to have a material and adverse effect on our revenues, income, profitability, liquidity or capital resources, or that would cause
the disclosed financial information to be not necessarily indicative of future results of operations or financial conditions.
E. Critical Accounting Estimates
Not applicable.
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
A. Directors and Senior Management
We are managed by our board of directors and by our senior
management, pursuant to our Amended and Restated Memorandum and Articles of Association and the Cayman Islands Companies Act (As Revised).
Board of Directors
Our board of directors is currently composed
of 10 members. Each of our director shall hold office for a two (2) year term and are eligible for re-election. Under our Amended and
Restated Memorandum and Articles of Association: (i) Bertelsmann, for so long as it holds a number of our Class B common shares in excess
of 10% of the total number of outstanding Class B common shares (referred to herein as the “Ownership Threshold”), shall be
entitled to appoint, at its sole discretion, up to seven of our directors, and shall be entitled at any time to remove, substitute or
replace any of its appointed directors for any reason in its sole discretion; (ii) the Esteves Family, for so long as it holds our Class
B common shares in excess of the Ownership Threshold, shall be entitled to appoint, at its sole discretion, up to two of our directors,
and shall be entitled at any time to remove, substitute or replace any of its appointed directors for any reason in its sole discretion;
and (iii) Bertelsmann and the Esteves Family, for so long as they hold our Class B common shares in excess of the Ownership Threshold
shall be entitled to jointly appoint, at their sole discretion, up to one (1) director and shall be entitled at any time to remove, substitute
or replace their appointed director for any reason in their sole discretion (provided that if only one of Bertelsmann and the Esteves
Family holds Class B common shares in excess of the Ownership Threshold, then only Bertelsmann or the Esteves Family, as applicable, shall
have these rights). Directors appointed by the board of directors hold office until the next annual general meeting. Our directors do
not have a retirement age requirement under our Articles of Association. Subject to the foregoing, the directors shall be elected by an
ordinary resolution of our shareholders, which requires the affirmative vote of a simple majority of the votes cast on the resolution
by the shareholders entitled to vote who are present, in person or by proxy, at the meeting.
The following table lists the current
members of our board of directors:
Name |
Age |
Position |
Nicolau Carvalho Esteves |
70 |
Co-Chairman |
Kay Krafft |
52 |
Co-Chairman |
Shobhna Mohn |
58 |
Director |
Benedikt Dalkmann |
38 |
Director |
Tina Krebs |
49 |
Director |
Renato Tavares Esteves |
35 |
Director |
Maria Tereza Azevedo |
41 |
Director |
João Paulo Seibel de Faria |
47 |
Independent Director* |
Vanessa Claro Lopes |
47 |
Independent Director* |
Miguel Filisbino Pereira de Paula |
61 |
Independent Director* |
| * | Member of our Audit Committee. At our annual shareholders’ meeting held on December 9, 2020, Vanessa Claro Lopes, João
Paulo Seibel de Faria and Miguel Filisbino Pereira de Paula were re-elected as independent directors of the Company, each to serve for
a two year term. On December 9, 2022, the Board of Directors noted that the mandate of each of Vanessa
Claro Lopes, João Paulo Seibel de Faria and Miguel Filisbino Pereira de Paula, as independent directors of the Company would shortly
expire and approved the continued appointment of such persons as interim directors to fill such vacancy and hold office as independent
directors until the next annual general meeting of the Company. |
The following is a brief summary of the business experience
of our directors. Unless otherwise indicated, the current business addresses for our directors is Alameda Oscar Niemeyer, No. 119, rooms
502, 504, 1,501 and 1,503, Vila da Serra, Nova Lima, Minas Gerais, Brazil.
Nicolau Carvalho Esteves. Nicolau Carvalho Esteves
is co-chairman of our board of directors, a position he has held since May 2022 after having held the position of chairman since July
2019. He is a qualified orthopedist and has over 25 years of experience in the education industry. He was the chairman of the board of
directors of Afya Brazil from August 2016 to December 2019, when the board of directors of Afya Brazil was extinguished. He is the founding
shareholder of the following companies, for which he served as Chief Executive Officer for the periods indicated (i) ITPAC—Instituto
Tocantinense Presidente Antônio Carlos S.A. (1999-2016); (ii) ITPAC Porto Nacional—Instituto Tocantinense Presidente
Antônio Carlos Porto S.A. (2008-2016); (iii) IPTAN—Instituto de Ensino Superior Presidente Tancredo de Almeida Neves
S.A. (2003-2016) and (iv) Instituto de Educação Superior do Vale do Parnaíba S.A. (2016-2018). He holds a Medicine
degree from Faculdade de Medicina de Barbacena, a master’s degree in Business Administration from FGV, a master’s degree in
Corporate Finance from Fundação Dom Cabral, a master’s degree in Business Administration from FEAD and a Business
Administration degree from AIEC.
Kay Krafft. Kay Krafft is co-chairman of our board
of directors, a position he has held since May 2022 after having held the position of director since August 2021. He is the founding CEO
of Bertelsmann Education Group. Until 2014, he was Chief Investment Officer of music rights management company BMG, building up the company
from a start-up to a major player in the music industry through acquisitions as well as the establishment of an international presence.
Before joining BMG’s Executive Board, he served as EVP and global head of M&A at Bertelsmann while implementing major portfolio
adjustments during this time. Prior to joining Bertelsmann, Kay Krafft was a partner at professional services firm Deloitte.
Shobhna Mohn. Shobhna Mohn is a member of our
board of directors, a position she has held since August 2021. She is Chief Strategy Officer at Bertelsmann Investments. Currently, Shobhna
is responsible for the strategic design and execution of Bertelsmann’s global VC investment funds in China, India, Brazil, US/Europe
as well as investments in Africa and Southeast Asia. Her focus is on governance, insights, knowledge exchange, identification and steering
of long-term strategic holdings. Main target areas of focus are on growth platforms such as e-commerce services, fintech, logistics, education
and health. As a member of the Investment Committees that evaluate and approve Bertelsmann’s VC investment targets, she has played
a key role in the VC investments of over Euro 1.4 billion since 2006 in more than 380 Investments with a current global portfolio of 270
investments. Shobhna is a member of the Bertelsmann Group Management Committee since 2019. She has been at Bertelsmann since 1996 in various
roles including Growth Regions Strategy, Investor Relations, and Venture Capital. She holds Bachelor’s (B.A.) and Master’s
degrees (both M.A. and M.Phil) in Mathematics from the Delhi University in India, and a M.Phil degree in Operations Research/Management
Science from Columbia Business School in New York, USA.
Benedikt Dalkmann. Benedikt Dalkmann is a member
of our board of directors, a position he has held since May 2022, in addition to being Chief Financial Officer of Bertelsmann Education
Group. He has played a formative role in developing the Group since its foundation in 2015, including the expansion of Relias into a major
player in U.S. healthcare education through acquisitions, as well as the establishment of an international presence. Before joining the
Education Group, Benedikt worked as Director of Strategy & Investments at Bertelsmann Group. Other experiences include a period in
Venture Capital at Holtzbrinck, and in management consulting.
Tina Krebs. Tina Krebs is a member of our board
of directors, a position she has held since May 2022, in addition to being the Chief People Officer of Bertelsmann Education Group and
the Chief People Officer at Relias, a Bertelsmann Education Group company. Until 2020, Tina held multiple roles at Relias including VP,
Client Care and VP, Integration, where she helped integrate multiple healthcare technology companies into the Relias portfolio. Before
joining Relias, Tina Krebs was a partner at the professional services firm, ScottMadden Management Consultants.
Renato Tavares Esteves. Renato Tavares Esteves
is a member of our board of directors, a position he has held since July 2019. He was a member of the board of directors of Afya Brazil
from August 2016 to December 2019, when the board of directors of Afya Brazil was extinguished. He served as executive officer of the
following companies: Instituto de Educação Superior do Vale do Parnaíba S.A., UNIVAÇO—União
Educacional do Vale do Aço S.A., IPTAN—Instituto de Ensino Superior Presidente Tancredo de Almeida Neves S.A., ITPAC—Instituto
Tocantinense Presidente Antônio Carlos S.A., and Instituto de Ensino Superior do Piauí S.A.—IESP. He holds
a degree in medicine from Faculdade de Medicina de Barbacena, and a master’s degree in Business Administration and Corporate Finance
from FGV.
Maria Tereza Azevedo. Maria Tereza Azevedo is
a member of our board of directors, a position she has held since April 2022. She joined Softbank LatAm fund in 2021 as Investment Director
leading the Education industry. Prior to joining Softbank, she was an Executive Director at Santander and Director at UBS Investment Bank
leading the TMT strategy and LatAm Education and the Technology, Media, and Telecommunications teams, respectively. She has extensive
experience in helping LatAm companies access the equity capital markets and holds a master’s degree in Corporate Finance and a bachelor’s
degree in Economics Science from IBMEC. Maria Tereza also serves as a board member of Descomplica and UOL EdTech.
Vanessa Claro Lopes. Vanessa Claro Lopes is a
member of our board of directors and an independent member of our audit and ethics committee, positions she has held since July 2019.
She is currently an independent member of the board of directors of Lojas Americanas S.A., member of the fiscal councils of Cosan S.A.,
Cosan Logística SA and Comgas S.A., the chairperson of the audit committee at Tegma Logistica S.A., a member of the audit committee
at Embraer S.A. and Lojas Americanas S.A. She was formerly the chairperson of the fiscal council of Via Varejo S.A. from 2014 to 2018,
a member of the fiscal council of Terra Santa Agro S.A. from 2016 to 2018, a member of the fiscal council of Gerdau S.A from 2016 to 2017
and a member of the fiscal councils of Estácio Participações S.A. and Renova Energia S.A. from 2017 to 2019. With
over 25 years’ experience in corporate governance and internal and external audits of large private and listed companies, she started
her career in 1995 at PricewaterhouseCoopers in advisory services and was responsible for the creation of the revenue assurance specialists
department in Brazil for the telecoms sector. She was an executive officer and the head of the internal accounting department of TAM S.A.
from 2010 to 2014, an executive officer and the head of the internal accounting department of Globex Utilidades S.A. (Grupo Pão
de Açúcar) from 2004 to 2010 and a coordinator and the head of the accounting department of Grupo Telefonica from 2000 to
2004. She holds an MBA from EAESP/FGV, a master’s degree in management systems from Universidade Federal Fluminense (UFF), a master’s
degree in computer networks from São Judas University, an accounting degree from Universidade Federal Fluminense (UFF) and a systems
analysis degree from FATEC/BS. She was formerly a professor of audit systems and information security at Objetivo University from 1997
to 1998.
João Paulo Seibel de Faria. João
Paulo Seibel de Faria is a member of our board of directors and an independent member of our audit and ethics committee, positions he
has held since August 2020. He is currently the CFO of OLX, a position he has held since August 26, 2020. He has more than 25 years of
experience in companies like Arthur Andersen S/C, Ericsson Telecomunicações and Microsoft. He spent 18 years at Microsoft
in different leadership roles in Latin America and the U.S. in sales, marketing and in finance, including his last role as chief financial
officer in Brazil. Since October 2019, he has been working as Latin America chief financial officer for Didi Chuxing (China Giant Mobility
Company that owns 99 Tecnologia in Brazil). Mr. Faria holds a bachelor’s degree in business management from FAAP and an Executive
MBA from IBMEC Business School (both in São Paulo). Additionally he holds several executive sessions in leadership,
strategy and global business environment from Fundação Dom Cabral, INSEAD and Devry.
Miguel Filisbino Pereira de Paula. Miguel Filisbino
Pereira de Paula is a member of our board of directors and an independent member of our audit and ethics committee, positions he has held
since August 2020. He has more than 35 years of experience in human resources in the Brazilian corporate world, holding positions such
as senior HR director of Grupo Pão de Açucar, HR vice president of Estácio Participações, head of organization
development at Votorantim Cimentos and HR of Grupo Gerdau. He holds an MBA degree from USP and a post-grad degree in HR from PUCRS.
Executive Officers
Our executive officers are responsible for the management
and representation of our company. We have a strong centralized team led by Virgilio Deloy Capobianco Gibbon, our CEO, with broad experience
in the education industry.
The following table lists our current executive officers.
Name |
Age |
Position |
Virgilio Deloy Capobianco Gibbon |
47 |
Chief Executive Officer |
Luis André Carpintero Blanco |
48 |
Chief Financial Officer |
Lélio de Souza Junior |
48 |
Vice President of Innovation & Digital Services |
The following is a brief summary of the business experience
of our executive officers. Unless otherwise indicated, the current business addresses for our executive officers is Alameda Oscar Niemeyer,
No 119, rooms 502, 504, 1,501 and 1,503, Vila da Serra, Nova Lima, Minas Gerais, Brazil.
Virgilio Deloy Capobianco Gibbon. Virgilio Deloy
Capobianco Gibbon is our Chief Executive Officer, a position he has held since July 2019. He has been the Chief Executive Officer of Afya
Brazil since August 2016. Prior to joining us, he was Chief Operating Officer and Chief Financial Officer of Estácio Participação
S.A., from March 2010 to March 2012, and March 2012 to June 2016, respectively. He was also Executive Director of Business Consulting
and Education Industry at TOTVS Consulting from October 2007 to December 2009, and Senior Manager of Business Consulting at Accenture
from 2000 to 2007. He holds a degree in economics from PUC-RJ. He is currently a board member of EABH—Escola Americana of Belo Horizonte.
Luis André Blanco. Luis André Blanco
is our Chief Financial Officer, a position he has held since April 2020. Prior to joining us, he served as CFO for OdontoPrev for 10 years,
where he oversaw corporate finance – treasury, financial planning, M&A, tax and accounting operations, legal and compliance.
Prior to that, Luis served as a Financial Officer at Vivo S.A from 2003 to 2009 and also as CFO at Tele Centro – Oeste Celular
Participações from 2000 to 2003. Luis holds a bachelor’s degree in engineering from the Federal University of
Rio de Janeiro and an executive program degree from University of Westminster, London, England.
Lélio de Souza Junior. Lélio de
Souza Junior is our Vice President of Innovation & Digital Services, a position he has held since January 2022. Prior to joining us,
he served as CEO for Intelie for 5 years, where he had the chance to support the internationalization of the company, the acquisition
process by RigNet (later on acquired by Viasat, NASDAQ: VSAT) and to experience a very well succeeded growth history. Prior to that, Lelio
served as a Corporate Officer at TOTVS from 2008 – 2016 and also as Senior Manager in Accenture from 2000-2008. Lelio holds a bachelor’s
degree in Mechanical Engineering from the Federal University of Minas Gerais (UFMG) and executive programs degrees from University of
Wharton, Pennsylvania, USA and Insper, São Paulo, Brazil.
Family Relationships
Nicolau Carvalho Esteves, the co-chairman of our board
of directors, is the father of Renato Tavares Esteves, one of our directors.
Legal Proceedings
In 2016, the federal prosecutors’ office filed
a public civil proceeding against Mr. Nicolau Carvalho Esteves, our co-chairman, and certain other individuals, for irregular administrative
acts alleged to have taken place during each of their respective terms as Health Secretary of the State of Tocantins
(Secretário de Saúde do Estado de Tocantins) between 2012 and 2014, a position held by Mr. Carvalho Esteves for a
period of four months, from March 9, 2012 to July 20, 2012. The prosecution alleges that Mr. Carvalho Esteves and the other individuals
did not apply federal funds in compliance with mandatory budgeting rules required by applicable federal statutes. On September 19, 2017,
the lower court dismissed the federal prosecutor’s claims on the basis that the alleged improper acts were carried out to allow
the public healthcare system in the State of Tocantins to continue to provide basic healthcare services, given there were insufficient
public funds allocated for that purpose at the time. The federal prosecutor’s office appealed the lower court’s decision and
on October 30, 2018, the federal court of appeals granted the appeal to overturn the lower court’s decision and to nullify the evidentiary
phase of the proceedings on the procedural technicality that the State of Tocantins had not been properly notified of its right to file
its motion on evidence. On May 3, 2019, Mr. Carvalho Esteves filed an appeal of the federal court of appeals decision with the Supreme
Court of Justice. In February 2022, a decision was issued, dismissing the motions submitted by the public prosecutor’s office, and
to date no appeal has been filed by the public prosecutor’s office. The risk of loss in these proceedings is classified as remote
by external counsel. If Mr. Carvalho Esteves is found liable, he may be subject to penalties, including a three-year prohibition on him
or any legal entity under his control transacting with public entities or being granted tax incentives/benefits, including Afya.
B. Compensation
Under Cayman Islands law, we are not required to disclose
compensation paid to our senior management on an individual basis and we have not otherwise publicly disclosed this information elsewhere.
Our executive officers, directors and management receive
fixed and variable compensation. They also receive benefits in line with market practice in Brazil. The fixed component of their compensation
is set on market terms and adjusted annually.
The variable component consists of cash bonuses and awards
of shares (or the cash equivalent). Cash bonuses or paid to executive officers and members of our management based on previously agreed
targets for the business. Shares (or the cash equivalent) are awarded under our share options long-term incentive program, as discussed
below.
The following table sets forth the fixed and variable
compensation of our key management personnel for the periods indicated:
|
For the Year
Ended December 31, |
|
2022 |
2021 |
2020 |
|
(in R$ millions) |
Short-term employee benefits |
13.6 |
11.9 |
9.6 |
Share-based compensation plans |
13.1 |
20.3 |
24.0 |
Total compensation |
26.7 |
32.2 |
33.6 |
Long-Term Incentive Plans
Afya Brazil Long-Term Incentive Plan
Certain members of our management participated in the
share option long-term incentive program, or the LTIP, of Afya Brazil. Beneficiaries under the LTIP were granted rights to buy shares
based on certain criteria. All unvested share options were automatically vested upon the consummation of our initial public offering,
and the LTIP was terminated on January 10, 2020.
New Afya Long-Term Incentive Plan
On August 30, 2019, our board of directors approved the
establishment of the new equity incentive plan, or the New LTIP, as amended on July 29, 2020, with the purpose of advancing the interests
of our shareholders by enhancing our ability to attract, retain and motivate individuals to perform at the highest level.
The New LTIP and the applicable option agreement to be
entered into between us and the beneficiary, or the Option Agreement, governs the issuance of equity incentive awards with respect to
our Class A common shares, or the Options. The calculation of the strike price of the Option will be set
forth in the applicable Option Agreement, as approved by the board of directors, upon the granting of the Option to the beneficiary. If
a beneficiary is dismissed by us, resigns, retires or dies, the portion of his or her Options under the New LTIP that has vested at that
date will be satisfied, but the non-vested portion will be canceled. If a beneficiary is terminated for cause, all of his or her Options
under the New LTIP will be canceled. The maximum aggregate number of shares that can be issued to beneficiaries under the New LTIP may
not exceed 4% of our share capital at any time, excluding treasury shares.
On July 8, 2022, our people and ESG committee approved
a change in the strike price of the current share-based compensation plan. All tranches still to be vested had their strike price modified
compared to the IPO price in Brazilian reais (R$71.22), adjusted from the IPO date until the exercise date using the CDI rate, excluding
dividends. The already vested tranches will remain on the previous settled strike price. On May 18, 2022, July 11, 2022 and September
14, 2022, the Company granted 1,234,919 additional stock options, respectively, at a strike price of R$70.00, R$52.00 and R$52.00, respectively.
As of December 31, 2022, a total of 3,729,287 options are outstanding under the New LTIP. For further information about vesting periods
and strike price, see note 16.b to our audited consolidated financial statements.
Restricted Stock Units Program
On July 8, 2022, our board of directors approved our
new restricted stock units program, or the RSU program, for employees. The participant’s right to effectively receive ownership
of restricted shares will be conditioned on the participant’s continuance as an employee or director in the business group from
the grant date until vesting. Employees will be entitled to these shares in a proportion of 10%, 20%, 30% and 40% each year. In July 2022
and September 2022, 442,546 and 4,678 restricted shares were granted, respectively, to our executives, with vesting periods from May 2023
to May 2026. The total number of outstanding restricted shares subject to the RSU program will not exceed, on any date, 1.2% of the total
number of our shares, excluding treasury shares.
C. Board Practices
Duties of Directors
As a matter of Cayman Islands law, a director of a Cayman
Islands company is considered a fiduciary of the company. Accordingly, directors owe fiduciary duties to their companies to act in accordance
with the best interests of the company, to exercise their powers for the purposes for which they are conferred and not to place themselves
in a position where there is a conflict between their personal interests and their duty to the company. Accordingly, a director owes a
company a duty not to make a profit based on his or her position as director (unless the company permits him or her to do so) and a duty
not to put himself or herself in a position where the interests of the company conflict with his or her personal interests or his or her
duties to a third party.
However, a company’s articles of association may
permit a director to vote on a matter in which he or she has a personal interest if he or she has disclosed the nature of his or her interest
to the board of directors. Our Articles of Association provide that a director must disclose the nature and extent of any material interests
in any contract or arrangement, and that he or she may vote at any meeting on any resolution concerning an interested matter, provided
he or she has disclosed the nature of his or her interest and has not been disqualified by the chairman of the relevant meeting.
A director of a Cayman Islands company also owes to the
company duties to exercise independent judgment in carrying out his or her functions and to exercise reasonable skill, care and diligence,
which has both objective and subjective elements. Recent Cayman Islands case law confirmed that directors must exercise the care, skill
and diligence that would be exercised by a reasonably diligent person having the general knowledge, skill and experience reasonably to
be expected of a person acting as a director. Additionally, a director must exercise the knowledge, skill and experience that he or she
actually possesses.
Election and Terms of Directors
See “Item 10. Additional Information.—B.
Memorandum and Articles of Association—Appointment, Disqualification and Removal of Directors.”
Board Committees
Our board of directors has established an audit, risks
and ethics committee and a compensation committee. On May 5, 2022, our board of directors voted to dissolve our business expansion committee,
such that the approval of any mergers and acquisitions, which was previously within the purview of the business expansion committee, will
now be submitted to the board of directors itself. In the future, our board of directors may establish other committees, as it deems appropriate,
to assist with its responsibilities.
Audit, Risks and Ethics Committee
The audit, risks and ethics committee, or the audit committee,
which consists of Vanessa Claro Lopes (elected to the committee on July 8, 2019), João Paulo Seibel de Faria (elected to the committee
on August 26, 2020) and Miguel Filisbino Pereira de Paula (elected to the committee on August 26, 2020) assists our board of directors
in overseeing our accounting and financial reporting processes and the audits of our financial statements. In addition, the audit committee
is directly responsible for the appointment, compensation, retention and oversight of the work of our independent registered public accounting
firm. João Paulo Seibel de Faria serves as chairman of the audit committee. The audit committee consists exclusively of members
of our supervisory board who are financially literate, and Vanessa Claro Lopes is considered an “audit committee financial expert”
as defined by the SEC. Our board of directors has determined that Vanessa Claro Lopes, João Paulo Seibel de Faria and Miguel Filisbino
Pereira de Paula satisfy the “independence” requirements set forth in Rule 10A-3 under the Exchange Act.
On January 29, 2021, our board of directors approved
the audit committee charter. The audit committee complies with applicable SEC and Nasdaq rules. Notwithstanding anything to the contrary
established in the audit committee charter, the audit committee is responsible for, among other things:
| · | the appointment, compensation, retention and oversight of any auditor or accounting firm engaged for the purpose of preparing or issuing
an audit report or performing other audit, review or attest services; |
| · | pre-approval of the audit services and non-audit services to be provided by our independent auditor before the auditor is engaged
to render such services; |
| · | review and discussions with the independent auditor its responsibilities under generally accepted auditing standards, the planned
scope and timing of the independent auditor’s annual audit plan(s) and significant findings from the audit; |
| · | obtaining and review of a report from the independent auditor describing all relationships between the independent auditor and the
Company consistent with the applicable PCAOB requirements regarding the independent auditor’s communications with the audit committee
concerning independence; |
| · | confirming and evaluating the rotation of the audit partners on the audit engagement team as required by law; |
| · | review with management and the independent auditor, in separate meetings whenever the audit committee deems appropriate, any analyses
or other written communications prepared by the management and/or the independent auditor setting forth significant financial reporting
issues and judgments made in connection with the preparation of the financial statements, including analyses of the effects of alternative
IFRS methods on the financial statements; and other critical accounting policies and practices of the Company; |
| · | review, in conjunction with the Chief Executive Officer and Chief Financial Officer of the Company, the Company’s disclosure
controls and procedures and internal control over financial reporting; |
| · | establishing procedures for the receipt, retention and treatment of complaints received by the Company regarding accounting, internal
accounting controls or auditing matters, and the confidential, anonymous submission by employees of the Company of concerns regarding
questionable accounting or auditing matters; and |
| · | approving or ratifying any related person transaction (as defined in our related person transaction policy) in accordance with our
related person transaction policy. |
The audit committee meets as often as it determines is
appropriate to carry out its responsibilities, but in any event, pursuant to its charter, the audit committee ordinarily meets at least
six times per year.
Information contained on our website shall not constitute,
or be deemed incorporated as, a part of this annual report.
In addition, our audit committee monitors ongoing compliance
with our code of ethics and related compliance policies.
People and ESG Committee
Since our initial public offering, we have established
a compensation committee. The compensation committee, which consists of Rafael Munerato de Almeida, Renato Tavares Esteves and Miguel
Filisbino Pereira de Paula, assists our board of directors in reviewing and approving the compensation structure, including all forms
of compensation, relating to our directors and executive officers. On January 29, 2021, our board of directors approved the compensation
committee charter and included the responsibility for the committee to indicate and recommend for board approval the appointment of our
independent directors, directors and executive officer. On May 26, 2021 our board of directors approved the amendment of the internal
bylaws of the compensation committee to change its name to People and ESG Committee and also to include strategic sustainability matters
and approve reports, adhere to national and/or international protocols, agreements, principles or treaties to be discussed and recommended
by the committee. Notwithstanding anything to the contrary established in the audit committee charter, the committee also reviews the
total compensation package for our executive officers and directors and recommends to the board of directors for determination the compensation
of each of our directors and executive officers, and will periodically review and approve any long-term incentive compensation or equity
plans, programs or similar arrangements, annual bonuses and employee pension and benefits plans. As permitted by the listing requirements
of Nasdaq, we have opted out of Nasdaq Listing Rule 5605(d), which requires that a compensation committee consist entirely of independent
directors. On August 25, 2021, the Board of Directors appointed Mr. Kay Krafft as a member of the People and ESG Committee. On May 5,
2022, our board of directors approved an amendment to the bylaws of our People and ESG Committee to give full authority to the People
and ESG Committee to approve certain matters. On October 6, 2022, the board of directors approved the review of certain aspects of these
bylaws, e.g., to include new responsibilities for the People and ESG Committee related to the review and approval of pension plans, compensation
instruments that are not regulated collectively, and the execution, termination or amendment of certain material and relevant employment
agreements.
Board Diversity Matrix
Board Diversity
Matrix (as of December 31, 2022) |
Country of Principal Executive Offices: |
Brazil |
Foreign Private Issuer: |
Yes (the Cayman Islands) |
Disclosure Prohibited under Home Country Law: |
No |
Total Number of Directors: |
11 |
|
Female |
Male |
Non-Binary |
Did Not Disclose
Gender |
Part I: Gender Identity |
|
Directors: |
2 |
9 |
0 |
0 |
Part II: Demographic Background |
|
|
|
|
Underrepresented Individual in Home Country Jurisdiction: |
3 |
LGBTQ+: |
— |
Did not Disclose Demographic Background: |
8 |
D. Employees
As of December 31, 2022, we had 8,708 employees, 7% of
which were based in our offices in Nova Lima and 93% of which were based in other cities elsewhere in Brazil. We also engage temporary
employees and consultants as needed to support our operations.
As of December 31, 2022, we (through Medcel) had approximately
167 medical content creators, who are responsible for developing our learning materials (including media, podcasts, quizzes, classes,
among others), including approximately 24 physician professors.
The table below breaks down our full-time personnel by
function as of December 31, 2022:
Function |
Number of Employees |
% of Total |
Management |
79 |
0.9% |
Shared Services Center and IT, Sales and Marketing |
850 |
9.8% |
Faculties |
3,117 |
35.8% |
General and Administrative |
4,662 |
53.5% |
Total |
8,708 |
100.0% |
Our employees in Brazil are represented by the labor
unions of independent sales agents and of consulting, information, research and accounting firms for the geographic area in which they
render services. We believe we have a constructive relationship with these unions, as we have never experienced strikes, work stoppages
or disputes leading to any form of downtime.
E. Share Ownership
For information regarding the share ownership of our
directors and senior management, see “Item 7. Major Shareholders and Related Party Transactions—A. Major Shareholders.”
For information as to stock options or restricted shares granted to our directors, executive officers and other employees, see “Item
6. Directors, Senior Management and Employees—B. Compensation—Afya Brazil Long-Term Incentive Plan” and “Item
6. Directors, Senior Management and Employees—B. Compensation—Long-Term Incentive Plans.”
F. Disclosure of a Registrant’s
Action to Recover Erroneously Awarded Compensation
Not applicable.
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
A. Major Shareholders
The following table and accompanying footnotes presents
information relating to the beneficial ownership of our Class A common shares, our Class B common shares, and our Series A perpetual convertible
preferred shares as of the date of this annual report:
| · | each person or group of affiliated persons, known by us to own beneficially 5% or more of our outstanding shares; |
| · | each of our executive officers and directors individually; and |
| · | all executive officers and directors as a group. |
The number of common shares beneficially owned by each
entity, person, executive officer or director is determined in accordance with the rules of the SEC, and the information is not necessarily
indicative of beneficial ownership for any other purpose. Under such rules, beneficial ownership includes any shares over which the individual
has sole or shared voting power or investment power as well as any shares that the individual has the right to acquire within 60 days
through the exercise of any option, warrant or other right. Except as otherwise indicated, and subject to applicable community property
laws, the persons named in the table have sole voting and investment power with respect to all common shares held by that person.
Unless otherwise indicated below, the business address
for each beneficial owner is c/o Afya, Alameda Oscar Niemeyer, No. 119, rooms 502, 504, 1,501 and 1,503, Vila da Serra, Nova Lima, Minas
Gerais, Brazil.
|
Shares Beneficially
Owned |
% of Total Voting
Power(1) |
|
Common Shares |
Preferred Shares |
|
Class A |
Class B |
Series A |
Shareholders |
Shares |
% |
Shares |
% |
Shares |
% |
% |
5% Shareholders Party to our Shareholders’ Agreement |
|
|
|
|
|
|
|
Bertelsmann SE & Co. KGaA (2) |
9,778,591 |
20.4% |
29,074,134 |
63.5% |
— |
— |
59.4% |
Nicolau Carvalho Esteves (3) |
113,811 |
* |
16,721,405 |
36.5% |
— |
— |
33.1% |
Rosângela de Oliveira Tavares Esteves(3) |
113,811 |
* |
16,714,713 |
36.5% |
— |
— |
33.0% |
Renato Tavares Esteves (4) |
2,545,844 |
5.3% |
— |
— |
— |
— |
0.5% |
Vanessa Tavares Esteves (5) |
2,435,440 |
5.1% |
— |
— |
— |
— |
0.5% |
Lílian Tavares Esteves de Carvalho (6) |
2,533,911 |
5.3% |
— |
— |
— |
— |
0.5% |
Other 5% Shareholders |
|
|
|
|
|
|
|
Ronald Baron (7) |
3,921,080 |
8.2% |
— |
— |
— |
— |
0.8% |
SoftBank Group Corp. (8) |
2,433,323 |
5.1% |
— |
— |
150,000 |
100% |
0.5% |
Other Executive Officers and Directors (9) |
|
|
|
|
|
|
|
Kay Krafft (10) |
— |
— |
— |
— |
— |
— |
— |
Shobhna Mohn (11) |
— |
— |
— |
— |
— |
— |
— |
Benedikt Dalkmann(12) |
— |
— |
— |
— |
— |
— |
— |
Tina Krebs(13) |
— |
— |
— |
— |
— |
— |
— |
João Paulo Seibel de Faria |
— |
— |
— |
— |
— |
— |
— |
Miguel Filisbino Pereira de Paula |
— |
— |
— |
— |
— |
— |
— |
Maria Tereza Azevedo |
— |
— |
— |
— |
— |
— |
— |
Vanessa Claro Lopes |
— |
— |
— |
— |
— |
— |
— |
Rafael Munerato de Almeida |
— |
— |
— |
— |
— |
— |
— |
Lélio de Souza Junior |
10,000 |
* |
— |
— |
— |
— |
* |
Luis André Carpintero Blanco |
17,170 |
* |
— |
— |
— |
— |
* |
Virgilio Deloy Capobianco Gibbon |
367,225 |
* |
— |
— |
— |
— |
* |
|
|
|
|
|
|
|
|
|
| * | Represents beneficial ownership of less than 1% of the respective class of our outstanding shares. |
| (1) | Percentage of total voting power represents voting power with respect to all of our Class A common shares and Class B common shares,
as a single class. Holders of our Class B common shares are entitled to 10 votes per share, whereas holders of our Class A common shares
are entitled to one vote per share. For more information about the voting rights of our Class A common shares and Class B common shares,
see “Item 10. Additional Information—B. Memorandum and Articles of Association—Description of Share Capital.”
The terms of our Series A perpetual convertible preferred shares require the approval of a majority of our Series A perpetual convertible
preferred shares voting as a separate class for us to take the following decisions, among others described in the certificate of designations:
(1) amend our organizational documents in a manner that would have an adverse effect on the Series A perpetual convertible preferred shares;
and (2) issue securities that are senior to, or equal in priority with, the Series A perpetual convertible preferred shares; except as
provided in the certificate of designations, our Series A perpetual convertible preferred shares otherwise are not entitled to vote. |
| (2) | Based on a statement by Bertelsmann SE & Co. KGaA and Erste WV Gütersloh GmbH on Schedule 13D filed on March 29, 2023, the
date of the last available Schedule 13D filed by such person with the SEC. Such person’s business address is at Carl-Bertelsmann-Strasse
270, 33311 Gütersloh, Germany. |
| (3) | Based on a statement by Nicolau Carvalho Esteves, Rosângela de Oliveira Tavares Esteves and NRE Capital Ventures Limited on
Schedule 13G filed on February 14, 2023, the date of the last available Schedule 13G filed by such person with the SEC. Nicolau Carvalho
Esteves is a member of our board of directors. Includes 113,811 Class A common shares and 16,707,489 Class B common shares held of record
by NRE Capital Ventures Limited, a company controlled by Nicolau Carvalho Esteves and Rosângela de Oliveira Tavares Esteves, who
hold 100% of its shares in joint tenancy. |
| (4) | Based on a statement by Renato Tavares Esteves on Schedule 13G filed on February 14, 2022, the date of the last available Schedule
13G filed by such person with the SEC. Renato Tavares Esteves is a member of our board of directors. |
| (5) | Based on a statement by Vanessa Tavares Esteves and VTE Capital Ventures Ltd. on Schedule 13G filed on February 14, 2023, the date
of the last available Schedule 13G filed by such person with the SEC. Consists of 654,643 Class A common shares held of record by Vanessa
Tavares Esteves and 1,780,797 Class A common shares held of record by VTE Capital Ventures Ltd., which is wholly-owned by Vanessa Tavares
Esteves. |
| (6) | Based on a statement by Lilian Tavares Esteves de Carvalho on Schedule 13G filed on February 14, 2022, the date of the last available
Schedule 13G filed by such person with the SEC. |
| (7) | Based on a statement on Schedule 13G filed on February 14, 2023, by BAMCO, Inc., Baron Capital Group, Inc., Baron Capital Management,
Inc., and Ronald Baron, the date of the last available Schedule 13G by such persons with the SEC. Such persons’ business address
is 767 Fifth Avenue, 49th Floor, New York, NY 10153. |
| (8) | Based on a statement on Schedule 13G filed on May 13, 2021 by SoftBank Group Corp. the date of the last available Schedule 13G by
such person with the SEC. Such person’s business address is 1-7-1 Kaigan, Minato-ku, Tokyo 105-7537 Japan. |
| (9) | Disclosure regarding the equity interest held by Messrs. Nicolau Carvalho Esteves and Renato Tavares Esteves, both members of our
board of directors, in us, is above. |
| (10) | Mr. Kay Krafft, a member of our board of directors, is the founding CEO of Bertelsmann Education Group. Mr. Krafft disclaims beneficial
ownership of the shares held by Bertelsmann except to the extent, if any, of his pecuniary interest therein. |
| (11) | Ms. Shobhna Mohn, a member of our board of directors, is the Chief Strategy Officer at Bertelsmann Investments. Ms. Mohn disclaims
beneficial ownership of the shares held by Bertelsmann except to the extent, if any, of her pecuniary interest therein. |
| (12) | Mr. Benedikt Dalkmann, a member of our board of directors, is the Chief Financial Officer at Bertelsmann Education Group. Mr. Dalkmann
disclaims beneficial ownership of the shares held by Bertelsmann except to the extent, if any, of his pecuniary interest therein. |
| (13) | Ms. Tina Krebs, a member of our board of directors, is the Chief People Officer at Bertelsmann Investments. Ms. Krebs disclaims beneficial
ownership of the shares held by Bertelsmann except to the extent, if any, of her pecuniary interest therein. |
The holders of
our Class A common shares and Class B common shares have identical rights, except that the Esteves Family and Bertelsmann as holders of
Class B common shares (i) are entitled to 10 votes per share, whereas holders of our Class A common shares are entitled to one vote
per share, (ii) have certain conversion rights and (iii) are entitled to maintain a proportional ownership interest by purchasing
additional Class B common shares in the event that additional Class A common shares are issued. For more information see “Item 10.
Additional Information—B. Memorandum and Articles of Association—Description of Share Capital—Preemptive or Similar
Rights” and “Item 10. Additional Information—B. Memorandum and Articles of Association—Description of Share Capital—Conversion.”
Each Class B common share is convertible into one Class A common share.
We are not aware of any other shareholder that beneficially
owns more than 5% of our common shares nor of any arrangements the operation of which may at a subsequent date result in a change of control
of the company.
Shareholders’ Agreement
On July 7, 2019, Crescera and the Esteves Family entered
into a shareholders’ agreement, or the Original Shareholders’ Agreement. The Original Shareholders’ Agreement specified
that Crescera could not transfer its shares in the Company, in whole or in part, without first offering them to Bertelsmann, which will
have the option to acquire such shares. On June 7, 2021, in connection with the acquisition by Bertelsmann of all Afya shares held by
Crescera as of such date pursuant to a share purchase agreement also entered into on such date, the Original Shareholders’ Agreement
was terminated and the Esteves Family and Bertelsmann determined to enter into an amended and restated shareholders’ agreement,
or the A&R Shareholders’ Agreement.
The A&R Shareholders’ Agreement provides that
the parties shall cooperate to ensure that Afya enters into a customary registration rights agreement with the parties. Further, (i) while
Bertelsmann holds an interest in Afya, or (ii) for a period of 5 (five) years from the moment the Original Shareholder ceases to hold
an interest in the Company (whichever occurs earlier), the Esteves Family is bound by a non-compete obligation preventing it from directly
or indirectly carrying on a competing business that is in direct competition with us, subject to certain limited exceptions.
B. Related Party Transactions
In addition to the compensation arrangements with directors
and executive officers described under “Item 6. Directors, Senior Management and Employees—B. Compensation” and certain
other rights of certain of the holders of our common shares as described under “—A. Major Shareholders—Shareholders’
Agreement,” the following is a description of each transaction since January 1, 2020 and each currently proposed transaction in
which the amount involved in the transactions is material to us and any related party.
Lease Agreements
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 Araguaína and ITPAC Porto Nacional, pursuant to which RVL agreed to lease campuses to those
entities 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 five years, and may be renewable for an additional
five years subject to the provisions of the lease agreement.
On September 6, 2018, RVL entered into a lease agreement
with ITPAC Araguaína, pursuant to which RVL agreed to lease to ITPAC the new ITPAC campus by RVL in the city of Palmas, State of
Tocantins. The lease agreement is for an amount equal to 7.5% of the monthly revenue of ITPAC during the prior semester, and will be effective
(and 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 and is renewable for an additional 20 years. As of December 31, 2022, the campus is fully operational.
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)
from July 2020 until March 2024, 6.5% of the monthly revenue of IPTAN 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 five years starting when the campus becomes
operational, and may be renewable for an additional five years subject to the provisions of the lease agreement. As of December 31, 2022,
the campus is fully operational.
On August 2, 2021, RVL entered into a lease agreement
with ITPAC Araguaína, pursuant to which RVL agreed to lease to ITPAC the new ITPAC Garanhuns medical campus, in the city of Garanhuns,
State of Pernambuco. The lease agreement is for a monthly amount equal to (i) up to June 2022, R$40; (ii) from July 2022 until December
2028, 6.5% of the monthly revenue of ITPAC Garanhuns during the prior semester, in each case adjustable in accordance with the provisions
of the lease agreement; and (iii) as from January 2029, the monthly amount should be adjusted by the inflation rate (IPCA). The lease
agreement is for a term of 20 years.
The lease payments in connection with the lease agreements
with RVL totaled R$20.4 million, R$15.3 million and R$11.3 million in the years ended December 31, 2022, 2021 and 2020, 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$3.4 million, R$3.2 million and R$3.0 million in the years ended December 31, 2022, 2021 and 2020, 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 revenue of IESVAP
until maturation. 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$4.9 million, R$4.6 million and R$3.5 million
in the years ended December 31, 2022, 2021 and 2020, respectively.
UEPC Services Agreement
On February 25, 2019, Medcel entered into a services
agreement with UEPC, pursuant to which Medcel agreed to provide certain educational services and content to UEPC, available on Medcel’s
online platform. The services agreement is for an amount equal to R$1.3 million, payable by UEPC to Medcel subject to the terms of the
services agreement. For the years ended December 31, 2022 and 2021, the revenues in connection with this services agreement totaled R$0.5
million and R$0.8 million, respectively.
See note 8 to our audited consolidated financial statements.
ITPAC Garanhuns Assignment Agreement
On March 28, 2019, our shareholder Nicolau Carvalho Esteves
entered into an agreement with Afya Brazil pursuant to which he assigned to Afya Brazil, in connection with a pending authorization by
MEC to operate a medical school, the right to develop the ITPAC Garanhuns greenfield unit, a medical school in the city of Garanhuns,
State of Pernambuco. The consummation of the assignment is subject to the approval of the ITPAC Garanhuns medical school authorization
by MEC, which must be obtained within 10 years from the execution of the assignment agreement. The purchase price paid by Afya Brazil
to Nicolau Carvalho Esteves to the extent MEC’s approval is obtained within the prescribed time period is R$900,000 multiplied
by the number of medical school seats authorized by MEC. Once operational, ITPAC Garanhuns is expect to generate 120 new medical school
seats. In 2008, two public civil proceedings were filed by the Brazilian federal government and the federal public prosecutor for the
suspension of the activities of the Garanhuns Greenfield unit, claiming that the status of the Garanhuns Greenfield unit with the MEC
was irregular. On November 5, 2021, the Secretary of Regulation and Supervision of Higher Education of the Ministry of Education (“MEC”)
authorized the operation of the medical school in Garanhuns in the State of Pernambuco. ITPAC Garanhuns authorization guaranteed 120 medical
seats to Afya, totaling a purchase price of R$108 million of which: 50% in cash on the transaction closing date and 50% in two equal annual
installments, adjusted by the CDI rate.
See “Item 8. Financial Information—Consolidated
Statements and Other Financial Information—Legal and Administrative Proceedings—Civil Matters.”
Related Person Transaction Policy
On January 29, 2021, our board of directors
approved the related party transactions and conflicts of interests’ policy that set forth our guidelines and procedures regarding
agreements with related parties. On December 19, 2022, our board of directors approved an amendment to our policy in order to reflect
certain revised approval thresholds.
Our related person transaction policy states that related
person transactions must be approved or ratified by our executive officers and board of directors. In determining whether to approve or
ratify a transaction with a related person, our executive officers or board of directors will consider all relevant facts and circumstances,
including without limitation the commercial reasonableness of the terms, of the transaction the benefit and perceived benefit, or lack
thereof, to us, opportunity costs of alternate transaction, the materiality and character of the related person’s direct or indirect
interest and the actual or apparent conflict of interest of the related person.
Pursuant to the related transaction policy, our executive
officers or board of directors will not approve or ratify a related person transaction unless it has determined that, upon consideration
of all relevant information, such transaction is in, or not inconsistent with, our best interests and the best interests of our shareholders.
Indemnification Agreements
We have executed indemnification agreements with our
directors and executive officers. The indemnification agreements and our Articles of Association require us to indemnify our directors
and executive officers to the fullest extent permitted by law.
Employment Agreements
Virgilio Deloy Capobianco Gibbon, Lélio de Souza
Junior and Luis André Carpintero Blanco entered into employment agreements with the Company. None of our directors have entered
into service agreements with the Company.
For a description of the compensation paid to our directors
and executive officers, see “Item 6. Directors, Senior Management and Employees—B. Compensation.”
Long-Term Incentive Plans
See “Item 6. Directors, Senior Management and Employees—B.
Compensation—Afya Brazil Long-Term Incentive Plan.” and “Item 6. Directors, Senior Management and Employees—B.
Compensation—Long-Term Incentive Plan.”
C. Interests of Experts and
Counsel
Not applicable.
ITEM 8. FINANCIAL INFORMATION
A. Consolidated Statements
and Other Financial Information
See Exhibits.
Legal and Administrative Proceedings
From time to time, we are involved in disputes that arise
in the ordinary course of our business. Any claims against us, whether meritorious or not, can be time consuming, result in costly litigation,
require significant management time and result in the diversion of significant operational resources.
We and our subsidiaries are subject to a number of judicial
and administrative proceedings in the Brazilian court systems, including civil, labor and tax law and social security claims and other
proceedings, which we believe are common and incidental to business operations in Brazil, in general. We recognize provisions for legal
proceedings in our financial statements, when we are advised by independent outside counsel that (i) it is probable that an outflow
of resources will be required to settle the obligation, and (ii) a reliable estimate can be made of the amount of the obligation.
The assessment of the likelihood of loss includes analysis by outside counsel of available evidence, the hierarchy of laws, available
case law, recent court rulings and their relevance in the legal system. Our provisions for probable losses arising from these matters
are estimated and periodically adjusted by management. In making these adjustments our management relies on the opinions of our external
legal advisors.
As of December 31, 2022, we had provisions recorded in
our audited consolidated financial statements in connection with legal proceedings for which we believe a loss is probable, in an aggregate
amount of R$195.9 million, and had made judicial deposits in an aggregate amount of R$12.7 million. However, legal proceedings are inherently
unpredictable and subject to significant uncertainties. If one or more cases were to result in a judgment against us in any reporting
period for amounts that exceeded our management’s expectations, the impact on our operating results or financial condition for that
reporting period could be material.
In addition, under the terms of the share purchase and sale agreements
between us and the selling shareholders of certain subsidiaries acquired by us, such selling shareholders are exclusively responsible
for any liabilities (including labor, tax and civil liabilities), which are or will be the subject of a claim by any third party, arising
from an act or fact that occurred, whether by action or inaction, prior to or on the closing dates of the respective acquisitions, and
such selling shareholders have agreed to indemnify us and our subsidiaries in the event of any losses relating to any such contingent
liabilities. Accordingly, our provisioned amounts related to such contingent liabilities are recorded as non-current liabilities, with
a corresponding amount recorded as non-current other assets; as of December 31, 2022, we recorded R$145.3 million as other non-current
assets with respect to provisioned amounts relating to such contingent liabilities.
Civil Matters
As of December 31, 2022, we and our subsidiaries were
party to approximately 6,965 civil proceedings, 2,953 of which are collection proceedings in which we are plaintiffs, 3,585 of which are
other judicial proceedings and 438 of which are administrative proceedings. The civil claims to which we are a party generally relate
to consumer claims, including those related to student complaints. We believe these proceedings are unlikely to have a material adverse
impact, individually, or in the aggregate, on our results of operations or financial condition.
On October 9, 2012, a civil suit was filed by Marly Luzia
Bernardes Rocha against ITPAC Porto Nacional and others, alleging (i) that Municipal Law No. 1780/03 in connection with IESPEN’s
creation is unconstitutional, and therefore that IESPEN’s dissolution and assignment of all its contingencies to ITPAC Porto Nacional
should be voided; (ii) that ITPAC Porto Nacional acted in bad faith and failed in its duties to pay for corresponding material damages,
loss of profits, loss of opportunity and moral damages; (iii) that Maria Aurora Pinto Leite e Silva and Celso Eduardo Avelar Freire,
shareholders of IESPEN, did not pay up corporate capital; and (iv) that ITPAC Porto Nacional should compensate the plaintiffs for
alleged illicit enrichment in connection with the dissolution. On January 12, 2014, ITPAC filed its defense, which is pending review by
the competent lower court. On November 13, 2016, the lower court froze 8% of ITPAC Porto Nacional’s monthly revenues in favor of
the plaintiffs, and the freeze order was overturned on January 12, 2017. We estimate the amount of any claim for damages that may be imposed
on us as a result of these proceedings to be approximately R$25.6 million, with the likelihood of loss as possible.
In 2008, two public civil proceedings were filed by the
Brazilian federal government and the federal public prosecutor for the suspension of the activities of the Garanhuns Greenfield unit,
claiming that the status of the Garanhuns Greenfield unit with the MEC was irregular. As of the date of this annual report, the activities
of the Garanhuns Greenfield unit are suspended pursuant to a judgment of the 23rd Federal Court of the State of Pernambuco. On February
27, 2020, the Superior Court of Justice confirmed the judgment of the 23rd Federal Court of the State of Pernambuco and the Garanhuns
Greenfield unit remains suspended. Afya Brazil is currently in discussions with MEC to obtain the necessary authorizations for the Garanhuns
Greenfield unit, and to the extent those authorizations are obtained, this proceeding will be extinguished. In July 2019, ITPAC Araguaina
filed an administrative proceeding requesting MEC’s reappraisal of its previous decision that denied the request of transferring
the administrative proceeding related to the medical course authorization, filed in 2011, from the state educational system to the federal
educational system, pursuant to applicable regulation. On September 2, 2020, MEC published Ordinance no. 722 recognizing the right of
ITPAC and determining the review of the regularization request formulated in 2011 by the institution. On November 5, 2021, the instruction
authorizing the start of educational activities was published.
On November 30, 2019, a public proceeding was filed by
Domingos Borges da Silva against Centro de Ensino São Lucas, other educational institutions and the city hall of Porto Velho, alleging
(i) that the defendants were purportedly not granting all the full scholarships to undergraduate students from “Programa de Inclusão
Social Universidade Para Todos – Faculdade da Prefeitura,” provided by Municipal Law No. 1,887/10 and modified by Municipal
Law No. 2,284/16; (ii) that due to the lack of full scholarships, the Treasury was being jeopardized because the agreement was for tax
waive in exchange to the full scholarships for the beneficiary from the referred Program; (iii) therefore, the plaintiff requires to be
awarded a preliminary injunction to revoke Municipal Laws Nos. 1,887/10 and 2,284/16 and the suspension of the adhesion contracts to the
Program signed by the defendants; and (iv) that the defendants should be liable for alleged material damages and loss of profits. On January
13, 2020, the lower court denied the preliminary injunction. On March 3, 2020, São Lucas was served. The lawsuit was not ruled
by the lower court yet. It is important to highlight that Centro de Ensino São Lucas is currently granting scholarships from the
Program and, by December 2020, there were 290 scholarships being offered. We estimate the amount of any claim for damages that may be imposed on us as a result of this proceeding
to be approximately of R$12.5 million, with the likelihood of loss as possible.
The provisions related to civil proceedings whose likelihood
of loss is assessed as probable are R$24.7 million as of December 31, 2022. There are other civil proceedings assessed by management and
our legal counsels as possible risk of loss, for which no provisions are recognized in the amount of R$59.6 million as of December 31,
2022.
Labor Matters
As of December 31, 2022, we and our subsidiaries were
party to approximately 260 labor proceedings, 178 of which are judicial proceedings and 82 of which are administrative proceedings. The
principal labor proceedings to which we are a party were filed by former employees or service providers seeking enforcement of labor rights
allegedly not provided by us. The judicial proceedings relate to employment bonds (judicial proceedings filed by former service providers),
overtime, premiums for hazardous workplace conditions, statutory severance, fines for severance payment delays, and compensation for workplace-related
accidents. The administrative proceedings relate to the alleged failure by us to comply with certain labor laws, including with respect
to working hours, the registration of employment agreements, disabled workers’ hiring quotas and the protection of underage workers
and apprentices.
The provisions related to labor proceedings whose likelihood
of loss is assessed as probable are R$22.4 million as of December 31, 2022. There are other labor proceedings assessed by management and
our legal counsels as possible risk of loss, for which no provisions are recognized in the amount of R$13.9 million as of December 31,
2022.
Tax and Social Security Matters
As of December 31, 2022, certain of our subsidiaries
were party to 75 tax and social security proceedings, 48 of which are judicial proceedings and 27 of which are administrative proceedings,
for which we did not record any provisions based on the advice of our external legal counsel that the likelihood of loss is possible.
The tax claims to which these subsidiaries are party are mostly tax foreclosures filed by Brazilian federal and municipal tax authorities.
The most significant tax claim is in an amount of R$52.4 million, in which Unigranrio is a plaintiff in a tax debit annulment action that
seeks to void three tax assessments relating to tax immunities in the collection of ISS taxes. As of the date of this annual report, a
decision by the trial court is pending.
ITPAC Porto Nacional is party to one tax foreclosure
proceeding filed by the Brazilian federal government on July 12, 2010 for the collection of social security contribution on payroll debts
in the total historical amount of R$2.8 million, for which we did not record any provisions based on the advice of our external legal
counsel that the likelihood of loss is possible. As of the date of this annual report, the amount of this proceeding is approximately
R$3.1 million and the proceeding is pending the decision of the lower court.
UniSL is party to tax proceeding filed by city of Porto
Velho on July 19, 2017 for having allegedly incurred in insufficient payment of ISS taxes in the total historical amount of R$6.0 million.
As of the date of this annual report, the amount of this proceeding is approximately R$12.8 million and the likelihood of loss as possible.
The provisions related to taxes proceedings whose likelihood
of loss is assessed as probable are R$148.7 million as of December 31, 2022. There are other Taxes proceedings assessed by Management
and its legal counsels as possible risk of loss, for which no provisions are recognized in the amount of R$4.9 million as of December
31, 2022.
“Mais Médicos” Proceedings
On January 15, 2019, Sociedade de Ensino Superior Estácio
de Sá Ltda., or SESES, filed a writ against SERES, requesting a judicial review of SERES’s decision to disqualify the SESES
bid to open a medical school in the city of Bragança, State of Pará, as part of the public procurement for the “Mais
Médicos” program, and award it to ITPAC Porto Nacional. The lower court granted a preventive injunction in favor of SESES,
suspending SERES’s award of the medical school to ITPAC Porto Nacional. ITPAC Porto Nacional joined these proceedings as a co-defendant.
On March 6, 2019, the federal prosecutor issued an opinion to dismiss the writ. On September 11, 2019, the lower court dismissed the writ
and revoked the suspension of the award of the medical school granted by MEC to ITPAC Porto Nacional, and we became authorized by MEC to open and operate a medical
school in the city of Bragança. As of the date of this annual report, the proceedings are pending the review of the appeal by the
Federal Court of Appeals.
On January 31, 2019, Brasil Educação S.A.,
or BR Educação, filed proceedings against SERES, requesting a judicial review of SERES’s decision to disqualify the
BR Educação bid to open a school in the city of Abaetetuba, State of Pará, as part of the public procurement for
the “Mais Médicos” program, and award it to ITPAC Porto Nacional. ITPAC Porto Nacional joined these proceedings
as a co-defendant. The lower court granted a preventive injunction in favor of BR Educação, suspending SERES’s award
of the medical school to ITPAC Porto Nacional.
This injunction was subsequently repealed by the Federal
Court of Appeals upon preliminary review. As of the date of this annual report, the proceedings are pending the issuance of the final
decision by the lower court and the Federal Court of Appeals, and ITPAC Porto Nacional is authorized by MEC to open and operate a medical
school in the city of Abaetetuba.
On February 2, 2019, in proceedings separate to those
of BR Educação, Faculdades Integradas Carajás S/C Ltda., or Faculdades Carajás, filed a writ against SERES,
requesting a judicial review of SERES’s decision to disqualify the Faculdades Carajás bid to open a medical school in the
city of Abaetetuba, State of Pará, as part of the public procurement for the “Mais Médicos” program,
and award it to ITPAC Porto Nacional. The lower court granted a preventive injunction in favor of Faculdades Carajás, suspending
SERES’s award of the school to ITPAC Porto Nacional. On October 10, 2019, Faculdades Carajás filed a motion to dismiss the
writ, and the writ was dismissed by the lower court on January 10, 2020. Consequently, ITPAC Porto Nacional is authorized by MEC to open
and operate a medical school in the city of Abaetetuba.
In July 2019, Instituto Metropolitano de Ensino Ltda.,
or IME, filed a lawsuit against SERES requesting the cancellation of the results of the public procurement for the “Mais Médicos”
program in connection with the awards granted to IPTAN and ITPAC Araguaína to open medical schools in the cities of Itacoatiara
and Manacapuru, located in the State of Amazonas. IME alleges that SERES’s final decision with respect to IME’s participation
in the public procurement was irregular. On September 11, 2019, the lower court granted a preventive injunction in favor of IME, suspending
SERES’s award of the medical schools to IPTAN and ITPAC Araguaína. IPTAN and ITPAC Araguaína joined these proceedings
as co-defendants. The preventive injunction was suspended following an appeal filed by SERES, and SERES, IPTAN and ITPAC Araguaína
filed their responses to IME’s allegations. As of the date of this annual report, these proceedings are pending the decision of
the lower court. On February 14, 2020, the preventive injunction granted in favor of IME to suspend the results of the public procurement
in the cities of Itacoatiara and Manacapuru was revoked by the Federal Court of Appeals. This decision gave a suspensive effect for the
appeal filed by IPTAN and ITPAC Araguaína, rendering the decisions of the first instance without effect.
Dividends and Dividend Policy
We have not adopted a dividend policy with respect to
future distributions of dividends. The amount of any distributions will depend on many factors such as our results of operations, financial
condition, cash requirements, prospects and other factors deemed relevant by our board of directors and, where applicable, our shareholders.
We currently intend to retain all available funds and any future earnings, if any, to fund the development and expansion of our business
and we do not anticipate paying any cash dividends in the foreseeable future. See “Item 3. Key Information—D. Risk Factors—Certain
Risks Relating to Our Class A Common Shares—It is unlikely that we will declare any dividends on our common shares in the foreseeable
future and therefore, you must rely on price appreciation of our common shares for a return on your investment.”
We may make any future determination to pay dividends
based on an ordinary shareholder resolution, but no dividend may exceed the amount recommended by our board of directors. Even if our
board of directors recommends a dividend payment, the form, frequency and amount will depend on a number of factors, including our future
operations and earnings, our capital requirements and surplus, our general financial condition, impositions of restrictions on conversions
and remittances of funds abroad in the jurisdictions where we operate, contractual restrictions and other factors that the board of directors
may deem relevant. Cash dividends on our common shares, if any, will be paid in U.S. dollars.
We are a holding company incorporated in the Cayman Islands.
We rely on dividends and distributions from our subsidiaries in Brazil for our cash requirements, including funds to pay our operating
expenses, service any debt we may incur and pay dividends and other cash distributions to our shareholders. Also, payments of dividends
from Afya Brazil to Afya Limited may be made according to cash requirements.
Our holding company structure makes us dependent on the operations of our subsidiaries and therefore, any determination to pay dividends
in the future will depend on our ability to receive distributions from them. See “Item 3. Key Information—D. Risk Factors—Certain
Risks Relating to Our Business and Industry—Our holding company structure makes us dependent on the operations of our subsidiaries.
We depend on dividend distributions by our subsidiaries, and we may be adversely affected if the performance of our subsidiaries is not
positive.”
Certain Cayman Islands Legal Requirements Related to Dividends
Under the Companies Act and our Articles of Association,
a Cayman Islands company may pay a dividend out of either its profit or share premium account, but a dividend may not be paid if this
would result in the company being unable to pay its debts as they fall due in the ordinary course of business. According to our Articles
of Association, dividends can be declared and paid out of funds lawfully available to us, which include the share premium account. Dividends,
if any, would be paid in proportion to the number of common shares a shareholder holds. For further information, see “Item 10. Additional
Information—E. Taxation—Cayman Islands Tax Considerations.”
Certain Brazilian Legal Requirements Related to Dividends
Our ability to pay dividends is directly related to positive
and distributable net results from our Brazilian subsidiaries. See “Item 3. Key Information—D. Risk Factors—Certain
Risks Relating to Our Business and Industry—Our holding company structure makes us dependent on the operations of our subsidiaries.
We depend on dividend distributions by our subsidiaries, and we may be adversely affected if the performance of our subsidiaries is not
positive.” Our Brazilian subsidiaries are required under Federal Law No. 6,404 dated December 15, 1976, as amended, to distribute
a mandatory minimum dividend to shareholders each year, which cannot be lower than 25% of their income for the prior year, unless a lower
mandatory minimum dividend is provided for in such subsidiary by-laws or such distribution is suspended by a decision of such subsidiary’s
shareholders at its annual shareholders’ meeting based on a report by its board of directors that such distribution would be incompatible
with its financial condition at that time.
In addition, if, for any legal reasons due to new laws
or bilateral agreements between countries, our Brazilian subsidiaries are unable to pay dividends to Cayman Islands companies, or if a
Cayman Islands company becomes incapable of receiving them, we may not be able to make any dividend payments in the future.
As of the date of this annual report, Afya Brazil and
certain of our subsidiaries are required by their respective bylaws to distribute the following minimum dividends to shareholders: (i) Afya
Brazil, ITPAC Araguaína, ITPAC Porto Nacional, IESP, IPTAN, UEPC, FASA, UniRedentor, PEBMED, FESAR, iClinic, Medicinae—at
least 25% of adjusted net profit in each fiscal year; (ii) Medcel—at least 50% of adjusted net profit in each fiscal year;
(iii) IESVAP—at least 80% of adjusted net profit in each fiscal year; (iv) UNIVAÇO—at least 90% of adjusted
net profit in each fiscal year; and (v) CCSI—at least 2% of net profit in each fiscal year. FADEP, CIS, IPEMED, IPEC, UniSL,
FCMPB, MedPhone, Medical Harbour, Cliquefarma, Além da Medicina, Cardiopapers, Glic and DelRey are limited liability companies
and their articles of association do not stipulate a mandatory minimum dividend.
We have not declared or paid any dividends to our shareholders
since our incorporation in the Cayman Islands on March 22, 2019. See note 17 to our audited consolidated financial statements for additional
information.
B. Significant Changes
Except as disclosed elsewhere in this annual report,
we have not experienced any significant changes since the date of our audited consolidated financial statements included in this annual
report.
ITEM 9. THE OFFER AND LISTING
A. Offer and Listing Details
On July 19, 2019, we completed our initial public offering.
On February 7, 2020, we completed a follow-on offering. Our common shares have been listed on the Nasdaq since July 19, 2019 under the
symbol “AFYA.” Prior to that date, there was no public trading market for our common shares.
B. Plan of Distribution
Not applicable.
C. Markets
See “—A. Offer and Listing Details”
above.
D. Selling Shareholders
Not applicable.
E. Dilution
Not applicable.
F. Expenses of the Issue
Not applicable.
ITEM 10. ADDITIONAL INFORMATION
A. Share Capital
Not applicable.
B. Memorandum and Articles
of Association
Description of Share Capital
We were incorporated on March 22, 2019 as a Cayman Islands
exempted company with limited liability duly registered with the Cayman Islands Registrar of Companies. Our corporate purposes are unrestricted
and we have the authority to carry out any object not prohibited by law as provided by Section 7(4) of the Companies Act.
Our affairs are governed principally by (i) our
Amended and Restated Memorandum and Articles of Association; (ii) the Companies Act; and (iii) the common law of the Cayman
Islands. As provided in our Amended and Restated Memorandum and Articles of Association, subject to Cayman Islands law, we have full capacity
to carry on or undertake any business or activity, do any act or enter into any transaction, and, for such purposes, full rights, powers
and privileges. Our registered office is c/o Maples Corporate Services Limited, P.O. Box 309, Ugland House, Grand Cayman, KY1-1104, Cayman
Islands.
Our Articles of Association authorize the issuance of
share capital of up to 1,000,000,000 shares of a nominal or par value of US$0.00005 each, which, at the date of this annual report, comprise
500,000,000 Class A common shares and 250,000,000 Class B common shares (which may be converted into Class A common shares in the manner
contemplated in our Articles of Association), and 250,000,000 shares of such class or classes (howsoever designated) and having the rights
that our board of directors may determine. As of the date of this annual report, we have 47,920,068 Class A common shares, of which 3,786,285
are common shares held in treasury, 45,802,763 Class B common shares, and 150,000 Series A perpetual convertible preferred shares of our
authorized share capital issued and outstanding.
The following is a summary of the material provisions
of our authorized share capital and our Articles of Association.
Share Capital
The Amended and Restated Memorandum and Articles of Association
currently authorize two classes of common shares: Class A common shares, which are entitled to one vote per share, and Class B common
shares, which are entitled to 10 votes per share and to maintain a proportional ownership interest in the event that additional Class
A common shares are issued. Any holder of Class B common shares may convert his or her shares at any time into Class A common shares on
a share-for-share basis. The rights of the two classes of common shares are otherwise identical, except as described below. The implementation of this
dual class equity structure was required by the Esteves Family and Crescera, our principal shareholders in the year of 2019, as a condition
of undertaking the initial public offering of our common shares. See “—Anti-Takeover Provisions in Our Articles of Association—Two
Classes of Common Shares.”
As of December 31, 2022, our total authorized share capital
was US$50,000, divided into 1,000,000,000 shares par value US$0.00005 each, of which:
| · | 500,000,000 shares are designated as Class A common shares; |
| · | 250,000,000 shares are designated as Class B common shares; and |
| · | 250,000,000 shares of such class or classes (howsoever designated) and having the rights as the Board may determine. |
As of December 31, 2022, the Company’s issued
and outstanding share capital was R$17,000 (R$17,000 as of December 31, 2021) represented by 93,722,831 shares comprised by 47,920,068
Class A common shares and 45,802,763 Class B common shares (93,722,831 shares comprised by 47,920,068 Class A common shares and 45,802,763
Class B common shares as of December 31, 2021). In addition, as of December 31, 2022, 150,000 Series A perpetual convertible preferred
shares were outstanding, representing approximately 6.6% of our outstanding common shares, including the Series A perpetual convertible
preferred shares on an as-converted basis.
Treasury Shares
As of December 31, 2022, Afya had 3,786,285 common shares
in treasury.
Issuance of Shares
Except as expressly provided in our Articles of Association,
our board of directors has general and unconditional authority to allot, grant options over, offer or otherwise deal with or dispose of
any unissued shares in the company’s capital without the approval of our shareholders (whether forming part of the original or any
increased share capital), either at a premium or at par, with or without preferred, deferred or other special rights or restrictions,
whether in regard to dividend, voting, return of capital or otherwise and to such persons, on such terms and conditions, and at such times
as the directors may decide, but so that no share shall be issued at a discount, except in accordance with the provisions of the Companies
Act. In accordance with its Articles of Association, Afya shall not issue bearer shares.
Our Articles of Association provide that at any time
that there are Class A common shares in issue, additional Class B common shares may only be issued pursuant to (i) a share split,
subdivision of shares or similar transaction or where a dividend or other distribution is paid by the issue of shares or rights to acquire
shares or following capitalization of profits, (ii) a merger, consolidation, or other business combination, or (iii) an issuance
of shares including Class A common shares or any other class of share designated as a common share pursuant to the Articles of Association,
whereby each holder of the Class B common shares is entitled to purchase a number of Class B common shares that would allow it to maintain
its proportional ownership interests in Afya (following an offer by Afya to each holder of Class B common shares to issue to such holder,
upon the same economic terms and at the same price, such number of Class B common shares as would ensure such holder may maintain a proportional
ownership interest in Afya pursuant to our Articles of Association). In light of: (a) the above provisions; (b) the fact that
future transfers by holders of Class B common shares will generally result in those shares converting to Class A common shares, subject
to limited exceptions as provided in the Articles of Association; and (c) the ten-to-one voting ratio between our Class B common
shares and Class A common shares, means that holders of our Class B common shares will in many situations continue to maintain control
of all matters requiring shareholder approval.
This concentration of ownership and voting power will
limit or preclude your ability to influence corporate matters for the foreseeable future. For more information see “—Preemptive
or Similar Rights.”
Our Articles of Association also provide that the issuance
of non-voting common shares requires the affirmative vote of a majority of the then-outstanding Class A common shares and the prior written
consent of a Bertelsmann Director and Esteves Family Director as set out below in “—Proceedings of the Board of Directors.”
Fiscal Year
Our fiscal year begins on January 1 of each year and
ends on December 31 of the same year.
Voting Rights
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. For more information see below “—Preemptive or Similar Rights”
and “—Conversion.” 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, except as provided below and as otherwise required
by law.
Our Articles of Association provide as follows regarding
the respective rights of holders of Class A common shares and Class B common shares:
(i) Class
consents from the holders of Class A common shares or Class B common shares, as applicable, shall be required for any variation to the
rights attached to their respective class of shares, however, the directors may treat any two or more classes of shares as forming one
class if they consider that all such classes would be affected in the same way by the proposal;
(ii) the rights
conferred on holders of Class A common shares shall not be deemed to be varied by the creation or issue of further Class B common shares
and vice versa; and
(iii) the rights
attaching to the Class A common shares and the Class B common shares shall not be deemed to be varied by the creation or issue of further
shares ranking pari passu therewith, the redemption or purchase of any shares of any class by the Company, the cancellation of authorised
but unissued shares of that class or the creation or issue of shares with preferred or other rights, including, without limitation, shares
with enhanced or weighted voting rights.
As set forth in the Articles of Association, the holders
of Class A common shares and Class B common shares, respectively, do not have the right to vote separately if the number of authorized
shares of such class is increased or decreased. Rather, the number of authorized Class A common shares and Class B common shares may be
increased or decreased (but not below the number of shares of such class then outstanding) by the affirmative vote of the holders of a
majority of the voting power of the issued and outstanding Class A common shares and Class B common shares, voting together in a general
meeting.
Preemptive or Similar Rights
The Class A common shares and Class B common shares are
not entitled to preemptive rights upon transfer and are not subject to conversion (except as described below under “—Conversion”),
redemption or sinking fund provisions.
The Class B common shares are entitled to maintain a
proportional ownership interest in the event that additional common and/or preferred shares are issued. As such, if Afya issues common
and/or preferred shares, it must first make an offer to each holder of Class B common shares to issue to such holder on the same economic
terms such number of Class B common shares as would ensure such holder may maintain a proportional ownership interest in Afya. This right
to maintain a proportional ownership interest may be waived by all of the holders of Class B common shares, such waiver to remain effective
until the date specified therein or 12 months from the date of the waiver.
Conversion
The outstanding Class B common shares are
convertible at any time as follows: (i) at the option of the holder, a Class B common share may be converted at any time into
one Class A common share or (ii) upon the election of the holders of all the then issued and outstanding Class B common shares,
all outstanding Class B common shares may be converted into a like number of Class A common shares. In addition, each Class B common
share will convert automatically into one Class A common share upon any transfer, whether or
not for value, except for certain transfers described in the Articles of Association, including transfers to holders of Class B common
shares, to affiliates, to and between the Esteves Family, Bertelsmann, their family members and their respective children, heirs and successors,
trusts solely for the benefit of the shareholder or their affiliates, and to partnerships, corporations and other entities exclusively
owned or controlled by the Class B shareholder or their affiliates and certain transfers to organizations that are exempt from taxation
under Section 501(c)(3) of the Internal Revenue Code of 1986, as amended. Furthermore, each Class B common share will convert automatically
into one Class A common share and no Class B common shares will be issued thereafter if, at any time, the total number of the issued and
outstanding Class B common shares is less than 10% of the total number of shares outstanding. To the extent that Bertelsmann or the Esteves
Family cease to be a Class B common shareholder, the rights nominally vested to each shall vest in their permitted transferee within the
meaning of our Articles of Association.
No class of our common shares may be subdivided or combined
unless the other class of common shares is concurrently subdivided or combined in the same proportion and in the same manner.
Equal Status
Except as expressly provided in our Articles of Association,
Class A common shares and Class B common shares have the same rights and privileges and rank equally, share ratably and are identical
in all respects as to all matters.
In the event of any merger, consolidation, scheme, arrangement
or other business combination requiring the approval of our shareholders entitled to vote thereon (whether or not Afya is the surviving
entity), the holders of Class A common shares shall have the right to receive, or the right to elect to receive, the same form of consideration
as the holders of Class B common shares, and the holders of Class A common shares shall have the right to receive, or the right to elect
to receive, at least the same amount of consideration on a per share basis as the holders of Class B common shares. In the event of any
(i) tender or exchange offer to acquire any Class A common shares or Class B common shares by any third-party pursuant to an agreement
to which Afya is a party, or (ii) any tender or exchange offer by Afya to acquire any Class A common shares or Class B common shares,
the holders of Class A common shares shall have the right to receive, or the right to elect to receive, the same form of consideration
as the holders of Class B common shares, and the holders of Class A common shares shall have the right to receive, or the right to elect
to receive, at least the same amount of consideration on a per share basis as the holders of Class B common shares.
Record Dates
For the purpose of determining shareholders entitled
to notice of, or to vote at any general meeting of shareholders or any adjournment thereof, or shareholders entitled to receive dividend
or other distribution payments, or in order to make a determination of shareholders for any other purpose, Our board of directors may
set a record date which shall not exceed 40 clear days prior to the date where the determination will be made.
General Meetings of Shareholders
As a condition of admission to a shareholders’
meeting, a shareholder must be duly registered as a shareholder of Afya at the applicable record date for that meeting and, in order to
vote, all calls or installments then payable by such shareholder to Afya in respect of the shares that such shareholder holds must have
been paid.
Subject to any special rights or restrictions as to voting
then attached to any shares, at any general meeting every shareholder who is present in person or by proxy (or, in the case of a shareholder
being a corporation, by its duly authorized representative not being himself or herself a shareholder entitled to vote) shall have one
vote per Class A common share and 10 votes per Class B common share.
As a Cayman Islands exempted company, Afya is not obliged
by the Companies Act to call annual general meetings; however, the Articles of Association provide that in each year the company will
hold an annual general meeting of shareholders, at a time determined by the board of directors. For the annual general meeting of shareholders
the agenda will include, among other things, the presentation of the annual accounts and the report of the directors (if any). In addition,
the agenda for an annual general meeting of shareholders will only include such items as have been included therein by the board of directors.
Also, Afya may, but is not required to (unless required
by the laws of the Cayman Islands), hold other extraordinary general meetings during the year. General meetings of shareholders are generally
expected to take place in Nova Lima, Brazil, but may be held elsewhere if the directors so decide.
The Companies Act provides shareholders a limited right
to request a general meeting and does not provide shareholders with any right to put any proposal before a general meeting in default
of a company’s Articles of Association. However, these rights may be provided in a company’s Articles of Association. Our
Articles of Association provide that upon the requisition of one or more shareholders representing not less than one-third of the voting
rights entitled to vote at general meetings, the board will convene an extraordinary general meeting and put the resolutions so requisitioned
to a vote at such meeting. The Articles of Association provide no other right to put any proposals before annual general meetings or extraordinary
general meetings.
Subject to regulatory requirements, the annual general
meeting and any extraordinary general meetings must be called by not less than 10 clear calendar days’ notice prior to the relevant
shareholders meeting and convened by a notice discussed below. Alternatively, upon the prior consent of all holders entitled to receive
notice, with regards to the annual general meeting, and a majority in number of the members (which shall include Bertelsmann and the Esteves
Family) together holding at least 95% in par value of the shares entitled to attend and vote, with regards to an extraordinary general
meeting, that meeting may be convened by a shorter notice and in a manner deemed appropriate by those holders.
Afya will give notice of each general meeting of shareholders
by publication on its website and in any other manner that it may be required to follow in order to comply with Cayman Islands law, Nasdaq
and SEC requirements. The holders of registered shares may be given notice of a shareholders’ meeting by means of letters sent to
the addresses of those shareholders as registered in our shareholders’ register, or, subject to certain statutory requirements,
by electronic means.
Holders whose shares are registered in the name of
DTC or its nominee, which we expect will be the case for all holders of Class A common shares, will not be a shareholder or member of
the company and must rely on the procedures of DTC regarding notice of shareholders’ meetings and the exercise of rights of a holder
of the Class A common shares.
A quorum for a general meeting consists of any one or
more persons holding or representing by proxy not less than one-third of the aggregate voting power of all shares in issue and entitled
to vote upon the business to be transacted.
A resolution put to a vote at a general meeting shall
be decided on a poll. An ordinary resolution to be passed by the shareholders at a general meeting requires the affirmative vote of a
simple majority of the votes cast by, or on behalf of, the shareholders entitled to vote, present in person or by proxy and voting at
the meeting. A special resolution requires the affirmative vote on a poll of no less than two-thirds of the votes cast by the shareholders
entitled to vote who are present in person or by proxy at a general meeting. Both ordinary resolutions and special resolutions may also
be passed by a unanimous written resolution signed by all the shareholders of our Company, as permitted by the Companies Act and our Articles
of Association.
Pursuant to our Articles of Association, general meetings
of shareholders are to be chaired by the co-chairman of our board of directors appointed by Bertelsmann or in his absence, the co-chairman
of the board of directors appointed by the Esteves Family. If both such co-chairmen are absent, the directors present at the meeting shall
appoint one of them to be chairman of the general meeting. If neither the chairmen nor another director is present at the general meeting
within 15 minutes after the time appointed for holding the meeting, the shareholders present in person or by proxy and entitled to vote
may elect any one of the shareholders to be chairman. The order of business at each meeting shall be determined by the chairman of the
meeting and he or she shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts and
things as are necessary or desirable for the proper conduct of the meeting, including, without limitation, the establishment of procedures
for the maintenance of order and safety, limitations on the time allotted to questions or comments on the affairs of the Company, restrictions
on entry to such meeting after the time prescribed for the commencement thereof, and the opening and closing of the polls. The chairman
shall not have the right to vote in his capacity as chairman and shall not have a casting vote.
Liquidation Rights
If Afya is voluntarily wound up, the liquidator, after
taking into account and giving effect to the rights of preferred and secured creditors and to any agreement between Afya and any creditors
that the claims of such creditors shall be subordinated or otherwise deferred to the claims of any other creditors and to any contractual
rights of set-off or netting of claims between Afya and any person or persons (including without limitation any bilateral or any multi-lateral
set-off or netting arrangements between the company and any person or persons) and subject to any agreement between Afya and any person
or persons to waive or limit the same, shall apply our property in satisfaction of its liabilities pari passu and subject thereto
shall distribute the property amongst the shareholders according to their rights and interests in Afya.
Special Matters
Afya may not without the prior written consent of (i) Bertelsmann
for so long as it holds Class B common shares in excess of the Ownership Threshold and (ii) the Esteves Family for so long as it
holds Class B common shares in excess of the Ownership Threshold: change the number of directors; amend its Memorandum and Articles of
Association; vary the rights attaching to shares; approve the winding-up, liquidation or dissolution of Afya; or take certain actions
in respect of its share capital as set out in the Articles of Association; register as an exempted limited duration company; or approve
the transfer by way of continuation of Afya to a jurisdiction outside the Cayman Islands.
Anti-Corruption and Anti-Money Laundering
Our Articles of Association contain stringent anti-corruption,
anti-money laundering and certain other related measures applicable to us, our officers and directors, and its service providers. The
Articles of Association provide that if one of our shareholders is found to have been involved in an act of corruption, money laundering
or other related irregular act, the directors shall convene a meeting to consider the circumstances of such incident, and establish a
course of action to be taken against such shareholder. The actions range from (i) suspending such shareholder from his/her duties
as a director, officer and/or employee (if applicable) of the Company; (ii) terminating such duties; (iii) directing such shareholder
to transfer the entirety of his/her shareholding in the Company to his/her children and/or heirs; or (iv) if such transfer is not
possible, resolve that the shares in the Company owned by such shareholder be mandatorily redeemed by us. Further, our Articles of Association
provide that we shall not engage the services of any provider that has been found to violate applicable anti-corruption laws, and further
provide that we and our shareholders shall not violate applicable anti-corruption laws.
Changes to Capital
Subject to the restrictions contained in the Articles
of Association and summarized above in “—Special Matters,” Afya may from time to time by ordinary resolution:
| · | increase its share capital by such sum, to be divided into shares of such amount, as the resolution shall prescribe; |
| · | consolidate and divide all or any of its share capital into shares of a larger amount than its existing shares; |
| · | convert all or any of its paid-up shares into stock and reconvert that stock into paid up shares of any denomination; |
| · | subdivide its existing shares or any of them into shares of a smaller amount, provided that in the subdivision the proportion between
the amount paid and the amount, if any, unpaid on each reduced share shall be the same as it was in the case of the share from which the
reduced share is derived; or |
| · | cancel any shares which, at the date of the passing of the resolution, have not been taken or agreed to be taken by any person and
diminish the amount of its share capital by the amount of the shares so canceled. |
Our shareholders may by special resolution, subject to
confirmation by the Grand Court of the Cayman Islands on an application by the Company for an order confirming such reduction, reduce
its share capital or any capital redemption reserve in any manner permitted by law.
In addition, subject to the provisions of the Companies
Act and our Articles of Association, Afya may:
| · | issue shares on terms that they are to be redeemed or are liable to be redeemed; |
| · | purchase its own shares (including any redeemable shares); and |
| · | make a payment in respect of the redemption or purchase of its own shares in any manner authorized by the Companies Act, including
out of its own capital. |
Transfer of Shares
Subject to any applicable restrictions set forth in the
Articles of Association, any shareholder of Afya may transfer all or any of his or her common shares by an instrument of transfer in the
usual or common form or in the form prescribed by the Nasdaq or any other form approved by the Company’s board of directors.
The Class A common shares are traded on the Nasdaq in
book-entry form and may be transferred in accordance with our Articles of Association and Nasdaq’s rules and regulations.
However, our board of directors may, in its absolute
discretion, decline to register any transfer of any common share which is either not fully paid up to a person of whom it does not approve
or is issued under any share incentive scheme for employees which contains a transfer restriction that is still applicable to such common
share. The board of directors may also decline to register any transfer of any common share unless:
| · | the instrument of transfer is lodged with Afya, accompanied by the certificate (if any) for the common shares to which it relates
and such other evidence as our board of directors may reasonably require to show the right of the transferor to make the transfer; |
| · | the instrument of transfer is in respect of only one class of shares; |
| · | the instrument of transfer is properly stamped, if required; |
| · | the common shares transferred are free of any lien in favor of Afya; and |
| · | in the case of a transfer to joint holders, the transfer is not to more than four joint holders. |
If the directors refuse to register a transfer they are
required, within 15 business days after the date on which the instrument of transfer was lodged, to send to the transferee notice of such
refusal.
Share Repurchases
The Companies Act and the Articles of Association permit
Afya to purchase its own shares, subject to certain restrictions. The board of directors may only exercise this power on behalf of Afya,
and subject to the Companies Act, the Articles of Association and to any applicable requirements imposed from time to time by the SEC,
the Nasdaq, or by any recognized stock exchange on which our securities are listed. Set forth below is a description of our share repurchase
programs.
1st Share Repurchase Program. Our Board
of Directors approved a share buyback program on December 23, 2020. Under the share buyback program, Afya may repurchase up to 1,015,844
of its outstanding Class A common shares in the open market, based on prevailing market prices, or in privately negotiated transactions,
over a period beginning on December 24, 2020 continuing until the earlier of the completion of the repurchase or December 31, 2021, depending
upon market conditions. We repurchased the shares to execute the stock option program for the executives of the company and utilized our
existing funds to fund repurchases made under this program. Our Board of Directors also authorized management to appoint BofA Securities,
Inc. as our agent to purchase the shares on our behalf in the open market. It is our intention such purchases benefit from the safe harbor
provided by Rule 10b-18 (“Rule 10b-18”) promulgated by the SEC under the Exchange Act. Accordingly, we shall not take, nor
permit any person or entity under its control to take, any action that could jeopardize the availability of Rule 10b-18 for purchases
of our common shares under the program. The share buyback program was completed on October 21, 2021, upon the completion of the purchase
of the full amount of Class A common shares permitted under the program.
2nd Share Repurchase Program. After
the completion of our first share repurchase program on October 21, 2021 that resulted in the purchase of 1,015,844 Class A common shares,
our Board of Directors approved a new share repurchase program on October 27, 2021, or the second share repurchase program. Under the
second share repurchase program, Afya may repurchase up to 1,383,108 of its outstanding Class A common shares in the open market, based
on prevailing market prices, or in privately negotiated transactions, beginning on October 28, 2021 until the earlier of the completion
of the repurchase or December 31, 2022, depending upon market conditions. We repurchased the shares to execute the stock option program
for the executives of the company and utilized our existing funds to fund repurchases made under this program. The Board of Directors
of Afya also authorized management to appoint BofA Securities, Inc. as its agent to purchase the shares on its behalf in the open market.
It is Afya’s intention that such purchases benefit from the safe harbor provided by Rule 10b-18 promulgated by the SEC under the
Exchange Act. Accordingly, Afya shall not take, nor permit any person or entity under its control to take, any action that could jeopardize
the availability of Rule 10b-18 for purchases under the program. The second share repurchase program was completed on January 14, 2022,
upon the purchase of the full amount of Class A common shares permitted under the second share repurchase program.
3rd Share Repurchase Program. After
the completion of our second share repurchase program, which resulted in the purchase of 1,383,108 Class A common shares, our Board of
Directors approved a new share repurchase program on January 27, 2022, or the third share repurchase program. Under the third share repurchase
program, Afya may repurchase up to 1,874,457 of its outstanding Class A common shares which represents 4% of its free float, in the open
market, based on prevailing market prices, or in privately negotiated transactions, beginning on January 27, 2022, until the earlier of
the completion of the repurchase or December 31, 2022, depending upon market conditions. We repurchased the shares for use in our stock
option program, as consideration in business combination transactions and for general corporate purposes and utilized our existing funds
and dividends received from Afya Brazil to fund repurchases made under this program. The Board of Directors of Afya also authorized management
to appoint BofA Securities, Inc. as its agent to purchase the shares on its behalf in the open market. It is Afya’s intention that
such purchases benefit from the safe harbor provided by Rule 10b-18 promulgated by the SEC under the Exchange Act. Accordingly, Afya shall
not take, nor permit any person or entity under its control to take, any action that could jeopardize the availability of Rule 10b-18
for purchases under the program. The third share repurchase program was completed on May 4, 2022, upon the purchase of the full amount
of Class A common shares permitted under the third share repurchase program.
4th Share Repurchase Program. After the completion
of our third share repurchase program, which resulted in the purchase of 1,874,457 Class A common shares, our board of directors has approved
a new share repurchase program on March 23, 2023, or the fourth share repurchase program. Under the fourth share repurchase program, Afya
may repurchase up to 2,000,000 of its outstanding Class A common shares, in the open market, based on prevailing market prices, or in
privately negotiated transactions, beginning on April 3, 2023 until the earlier of the completion of the repurchase or December 31, 2024,
depending upon market conditions.
The share repurchases may be made from time to time through
open market transactions and are subject to market and business conditions, levels of available liquidity, cash requirements for other
purposes, regulatory, and other relevant factors. Afya intends to repurchase the shares for use in its stock option and restricted shares
programs, as consideration in future business combination transactions and for general corporate purposes. Afya expects to utilize its
existing funds and future dividends to be received from Afya Brazil and/or strike price funds to be received in connection with any option
exercises under its stock option program, to fund repurchases made under this program. Afya’s Board of Directors will review the
share repurchase program periodically and may authorize adjustments to its terms and size or suspend or discontinue the program.
The Board of Directors of Afya also authorized management
to appoint BofA Securities, Inc. as its agent to purchase the shares on its behalf in the open market. It is Afya’s intention that
such purchases benefit from the safe harbors provided by Rules 10b-18 and 10b5-1 promulgated by the SEC under the Exchange Act. Accordingly,
Afya shall not take, nor permit any person or entity under its control to take, any action that could jeopardize the availability of Rules
10b-18 or 10b5-1 for purchases under the program.
Dividends and Capitalization of Profits
We have not adopted a dividend policy with respect to
payments of any future dividends by Afya. Subject to the Companies Act, our shareholders may, by resolution passed by a simple majority
of the voting rights entitled to vote at a general meeting, declare dividends (including interim dividends) to be paid to shareholders
but no dividend shall
be declared in excess of the amount recommended by the board of directors.
The board of directors may also declare dividends. Dividends may be declared and paid out of funds lawfully available to Afya. Except
as otherwise provided by the rights attached to shares and the Articles of Association of Afya, all dividends shall be paid in proportion
to the number of Class A common shares or Class B common shares a shareholder holds at the date the dividend is declared (or such other
date as may be set as a record date); but, (i) if any share is issued on terms providing that it shall rank for dividend as from
a particular date, that share shall rank for dividend accordingly, and (ii) where we have shares in issue which are not fully paid
up (as to par value) we may pay dividends in proportion to the amounts paid up on each share.
The holders of Class A common shares and Class B common
shares shall be entitled to share equally in any dividends that may be declared in respect of our common shares from time to time. In
the event that a dividend is paid in the form of Class A common shares or Class B common shares, or rights to acquire Class A common shares
or Class B common shares, (i) the holders of Class A common shares shall receive Class A common shares, or rights to acquire Class
A common shares, as the case may be; and (ii) the holders of Class B common shares shall receive Class B common shares, or rights
to acquire Class B common shares, as the case may be.
Series A perpetual convertible preferred shares rank
senior to our common with respect to dividend rights and rights on the distribution of assets on any voluntary or involuntary liquidation,
dissolution or winding up of the affairs of the Company. The holders of Series A perpetual convertible preferred shares are entitled to
a cumulative dividend at the rate of 6.5% per annum, payable quarterly in arrears. Dividends are payable in kind through the issuance
of additional Series A perpetual convertible preferred shares, in cash, or in any combination of both, at our discretion. The holders
of the Series A perpetual convertible preferred shares are also entitled to participate in dividends declared or paid on our common stock
on an as-converted basis.
Appointment, Disqualification and Removal of Directors
Afya is managed by its board of directors. The Articles
of Association provide that, unless otherwise determined by a special resolution of shareholders, the board of directors will be composed
of four to 14 directors, with the number being determined by a majority of the directors then in office. There are no provisions relating
to retirement of directors upon reaching any age limit. The Articles of Association also provide that, while our shares are admitted to
trading on Nasdaq, the board of directors must always comply with the residency and citizenship requirements of the U.S. securities laws
applicable to foreign private issuers. Bertelsmann for so long as it holds Class B common shares in excess of the Ownership Threshold
may appoint up to seven directors at its discretion (and is entitled at any time to remove substitute or replace such directors) (“Bertelsmann
Directors”), and the Esteves Family for so long as it holds Class B common shares in excess of the Ownership Threshold may appoint
up to two directors at its discretion (and is entitled at any time to remove substitute or replace such directors) (“Esteves Family
Directors”), in addition for so long as both hold Class B common shares in excess of the Ownership Threshold, they may appoint a
further director (the “Joint Director”) and are entitled at any time to remove, substitute or replace the Joint Director (provided
that if only one of Bertelsmann and the Esteves Family holds Class B Common Shares in excess of the Ownership Threshold, then only Bertelsmann
or the Esteves Family, as applicable, shall have such right). The Board of Directors shall have one (1) co-chairman appointed by Bertelsmann,
for so long as it holds Class B Common Shares in excess of the Ownership Threshold and one (1) co-chairman appointed by the Esteves Family,
for so long as it holds Class B Common Shares in excess of the Ownership Threshold, thereafter, the chairman of the Board of Directors
shall be appointed by a majority of the Directors then in office.
Subject to the foregoing, the Articles of Association
provide that directors shall be elected by an ordinary resolution of our shareholders, which requires the affirmative vote of a simple
majority of the votes cast on the resolution by the shareholders entitled to vote who are present, in person or by proxy, at the meeting.
Each director shall be appointed and elected for a two-year term or until his or her death, resignation or removal, and is eligible for
re-election.
For the names of our directors, see “Item 6. Directors,
Senior Management and Employees—A. Directors and Senior Management—Board of Directors.”
Any vacancies on the board of directors that arise
other than in respect of the Bertelsmann and/or Esteves Family director appointments set out above or upon the removal of a director
by resolution passed at a general meeting can be filled by the remaining directors (notwithstanding that they may constitute less
than a quorum). Any such appointment shall be as an interim director to fill such vacancy until
the next annual general meeting of shareholders.
Subject to the foregoing, additions to the existing board
(within the limits set pursuant to the Articles of Association) may be made by ordinary resolution of the shareholders.
Our board of directors has an audit committee in place.
See “Item 6. Directors, Senior Management and Employees—A. Directors and Senior Management—Audit Committee.”
Grounds for Removing a Director
A director may be removed with or without cause by ordinary
resolution, save that each Bertelsmann Director may only be removed by Bertelsmann at its discretion and each Esteves Family Director
may only be removed by the Esteves Family at its discretion.
The notice of general meeting must contain a statement
of the intention to remove the director and must be served on the director not less than 10 calendar days before the meeting. The director
is entitled to attend the meeting and be heard on the motion for his removal.
The office of a director will be vacated automatically
if he or she (i) becomes prohibited by law from being a director, (ii) becomes bankrupt or makes an arrangement or composition
with his creditors, (iii) dies or is in the opinion of all his co-directors, incapable by reason of mental disorder of discharging
his duties as director, (iv) resigns his office by notice to us or (v) has for more than six months been absent without permission
of the directors from meetings of the board of directors held during that period, and the remaining directors resolve that his or her
office be vacated. Further, the Directors may remove a Director as set out above in “—Anti-Corruption.”
Proceedings of the Board of Directors
The Articles of Association provide that our business
is to be managed and conducted by the board of directors, save that Afya may not without (i) the consent of a Bertelsmann Director
while there is a Bertelsmann Director and (ii) the consent of an Esteves Family Director while there is an Esteves Family Director:
create new classes of shares, issue new shares, options, warrants or convertible securities of similar nature conferring the right upon
the holders thereof to subscribe for purchase or receive any class of shares or securities in the capital of Afya; repurchase or redeem
any shares; execute and/or terminate any shareholders’ agreement, quotaholders’ agreement, or any other agreements related
to our interest in any subsidiary; approve our financial statements; effect any follow-on offerings of Afya; approve the listing and/or
the delisting of our securities with any designated stock exchange; conduct, negotiate, terminate and/or amend any business, agreement,
or transaction between Afya and any related party valued in excess of R$10.0 million, provided that, (A) if the Related Party is the Esteves
Family (or an Affiliate thereof), then the consent of the Esteves Family Director shall not be required and (B) if the Related Party is
Bertelsmann (or an Affiliate thereof), then the consent of the Bertelsmann Director shall not be required; approve any sale or encumbrance,
for the benefit of a person of shares issued by any subsidiary, or the admission of any new partner or shareholder in such subsidiaries;
carry out any investments outside the scope of the core business of Afya (as set out in the Articles of Association); incorporate any
entity; appoint or terminate the engagement of any auditor that is not an Authorized Auditor as set out in the Articles of Association;
provide any guarantee in respect of any person or related person of any of our shareholders, director and/or officers inter alia; or take
actions in connection with the Company’s Anti-Corruption measures, provided that if the Anti-Corruption measures relate to either
Bertelsmann or the Esteves Family, then the consent of the Esteves Family Director or the Bertelsmann Director respectively shall not
be required.
The quorum necessary for the board meeting shall be a
simple majority of the directors then in office (subject to there being a minimum of two directors present), and business at any meeting
shall be decided by a majority of votes. In the case of an equality of votes, neither the chairmen of the board nor the chairman of the
meeting shall have a casting vote.
Subject to the foregoing and the provisions of the Articles
of Association, the board of directors may regulate its proceedings as they determine is appropriate. Board meetings shall be held bi-monthly
and shall take place either in Nova Lima, Brazil, or at such other place as the directors may determine.
Subject to the provisions of the Articles of Association,
to any directions given by ordinary resolution of the shareholders and the listing rules of the Nasdaq, the board of directors may from
time to time at its discretion exercise all powers of Afya, including, subject to the Companies Act, the power to issue debentures, bonds
and other securities of the company, whether outright or as collateral security for any debt, liability or obligation of our company or
of any third-party.
Inspection of Books and Records
Holders of Afya shares have no general right under Cayman
Islands law to inspect or obtain copies of the list of shareholders or corporate records of the Company. However, the board of directors
may determine from time to time whether and to what extent our accounting records and books shall be open to inspection by shareholders
who are not members of the board of directors. Notwithstanding the above, the Articles of Association provide shareholders with the right
to receive annual financial statements and upon request agreements executed by the Company and its Related Parties (as defined in the
Articles of Association), shareholder agreements to which the Company is a party and details of any incentive plan. Such right to receive
annual financial statements may be satisfied by publishing the same on the company’s website or filing such annual reports as we
are required to file with the SEC.
Register of Shareholders
The Class A common shares are held through DTC, and DTC
or Cede & Co., as nominee for DTC, and recorded in the shareholders’ register as the holder of our Class A common shares.
Under Cayman Islands law, Afya must keep a register of
shareholders that includes:
| · | the names and addresses of the shareholders, a statement of the shares held by each member and of the amount paid or agreed to be
considered as paid, on the shares of each member; |
| · | whether voting rights attach to the shares in issue; |
| · | the date on which the name of any person was entered on the register as a member; and |
| · | the date on which any person ceased to be a member. |
Under Cayman Islands law, the register of shareholders
of Afya is prima facie evidence of the matters set out therein (i.e., the register of shareholders will raise a presumption of fact on
the matters referred to above unless rebutted) and a shareholder registered in the register of shareholders is deemed as a matter of Cayman
Islands law to have prima facie legal title to the shares as set against his or her name in the register of shareholders.
However, there are certain limited circumstances where
an application may be made to a Cayman Islands court for a determination on whether the register of members reflects the correct legal
position. Further, the Cayman Islands court has the power to order that the register of members maintained by a company should be rectified
where it considers that the register of members does not reflect the correct legal position. If an application for an order for rectification
of the register of members were made in respect of our ordinary shares, then the validity of such shares may be subject to re-examination
by a Cayman Islands court.
Exempted Company
Afya is an exempted company with limited liability under
the Companies Act. The Companies Act distinguishes between ordinary resident companies and exempted companies. Any company that is registered
in the Cayman Islands but conducts business mainly outside of the Cayman Islands may apply to be registered as an exempted company. The
requirements for an exempted company are essentially the same as for an ordinary company except for the exemptions and privileges listed
below:
| · | an exempted company does not have to file an annual return of its shareholders with the Registrar of Companies; |
| · | an exempted company’s register of shareholders is not open to inspection; |
| · | an exempted company does not have to hold an annual general meeting; |
| · | an exempted company may issue shares with no par value; |
| · | an exempted company may obtain an undertaking against the imposition of any future taxation (such undertakings are usually given for
20 years in the first instance); |
| · | an exempted company may register by way of continuation in another jurisdiction and be deregistered in the Cayman Islands; |
| · | an exempted company may register as a limited duration company; and |
| · | an exempted company may register as a segregated portfolio company. |
“Limited liability” means that the liability
of each shareholder is limited to the amount unpaid by the shareholder on the shares of the company (except in exceptional circumstances,
such as involving fraud, the establishment of an agency relationship or an illegal or improper purpose or other circumstances in which
a court may be prepared to pierce or lift the corporate veil).
We are subject to reporting and other informational requirements
of the Exchange Act, as applicable to foreign private issuers. Except as otherwise disclosed in this annual report, we comply with the
Nasdaq rules in lieu of following home country practice.
Anti-Takeover Provisions in Our Articles of Association
Some provisions of the Articles of Association may discourage,
delay or prevent a change in control of Afya or management that shareholders may consider favorable. In particular, the capital structure
of Afya concentrates ownership of voting rights in the hands of the Esteves Family and Bertelsmann. These provisions, which are summarized
below, are expected to discourage coercive takeover practices and inadequate takeover bids. These provisions are also designed to encourage
persons seeking to acquire control of Afya to first negotiate with the board of directors. However, these provisions could also have the
effect of discouraging others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in
the market price of the Class A common shares that often result from actual or rumored hostile takeover attempts. These provisions may
also have the effect of preventing changes in the management of Afya. It is possible that these provisions could make it more difficult
to accomplish transactions that shareholders may otherwise deem to be in their best interests.
Two Classes of Common Shares
The Class B common shares of Afya are entitled to 10
votes per share, while the Class A common shares are entitled to one vote per share. Since they own of all of the Class B common shares
of Afya, the Esteves Family and Bertelsmann currently have the ability to elect all directors and to determine the outcome of most matters
submitted for a vote of shareholders. This concentrated voting control could discourage others from initiating any potential merger, takeover,
or other change of control transaction that other shareholders may view as beneficial.
So long as the Esteves Family and Bertelsmann have the
ability to determine the outcome of most matters submitted to a vote of shareholders, third parties may be deterred in their willingness
to make an unsolicited merger, takeover, or other change of control proposal, or to engage in a proxy contest for the election of directors.
As a result, the fact that Afya has two classes of common shares may have the effect of depriving you as a holder of Class A common shares
of an opportunity to sell your Class A common shares at a premium over prevailing market prices and make it more difficult to replace
the directors and management of Afya.
Preferred Shares
Our board of directors is given wide powers to issue
one or more classes or series of shares with preferred rights. Such preferences may include, for example, dividend rights, conversion
rights, redemption privileges, enhanced voting powers and liquidation preferences.
Despite the anti-takeover provisions described above,
under Cayman Islands law, our board of directors may only exercise the rights and powers granted to them under the Articles of Association,
for what they believe in good faith to be in the best interests of Afya.
For further information on our outstanding Series A perpetual
convertible preferred shares, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources—Indebtedness—Series
A Perpetual Convertible Shares” and note 13.2.1(d) to our audited consolidated financial statements included elsewhere in this annual
report.
Protection of Non-Controlling Shareholders
The Grand Court of the Cayman Islands may, on the application
of shareholders holding not less than one fifth of the shares of Afya in issue, appoint an inspector to examine the Company’s affairs
and report thereon in a manner as the Grand Court shall direct.
Subject to the provisions of the Companies Act, any shareholder
may petition the Grand Court of the Cayman Islands which may make a winding up order, if the court is of the opinion that this winding
up is just and equitable.
Notwithstanding the U.S. securities laws and regulations
that are applicable to Afya, general corporate claims against Afya by its shareholders must, as a general rule, be based on the general
laws of contract or tort applicable in the Cayman Islands or their individual rights as shareholders as established by our Articles of
Association.
The Cayman Islands courts ordinarily would be expected
to follow English case law precedents, which permit a minority shareholder to commence a representative action against Afya, or derivative
actions in our name, to challenge (i) an act which is ultra vires or illegal, (ii) an act which constitutes a fraud against
the minority and the wrongdoers themselves control Afya, and (iii) an irregularity in the passing of a resolution that requires a
qualified (or special) majority.
Registration Rights and Restricted Shares
Although no shareholders of Afya have formal registration
rights, they or entities controlled by them or their permitted transferees will be able to sell their shares in the public market from
time to time without registering them, subject to certain limitations on the timing, amount and method of those sales imposed by regulations
promulgated by the SEC.
Principal Differences between Cayman Islands and U.S. Corporate Law
The Companies Act was modeled originally after similar
laws in England and Wales but does not follow subsequent statutory enactments in England and Wales. In addition, the Companies Act differs
from laws applicable to U.S. corporations and their shareholders. Set forth below is a summary of the significant differences between
the provisions of the Companies Act applicable to Afya and the laws applicable to companies incorporated in the United States and their
shareholders.
Mergers and Similar Arrangements
The Companies Act permits mergers or consolidations between
two Cayman Islands companies, or between a Cayman Islands company and a company incorporated in another jurisdiction (provided that is
facilitated by the laws of that other jurisdiction).
Where the merger or consolidation is between two Cayman
Islands companies the directors of each company must approve a written plan of merger or consolidation, which must then be authorized
by (a) a special resolution (usually a majority of 66 2/3 % in value) of the shareholders of each company; and (b) such other
authorization, if any, as may be specified in such constituent company’s articles of association. No shareholder resolution is required
for a merger between a parent company (i.e., a company that owns at least 90% of the issued shares of each class in a subsidiary company)
and its subsidiary company. The consent of each holder of a fixed or floating security interest of a constituent company must be obtained,
unless the court waives such requirement. If the Cayman Islands Registrar of Companies is satisfied that the requirements of the Companies
Act (which includes certain other formalities) have been complied with, the Registrar of Companies will register the plan of merger or
consolidation. Where the merger or consolidation involves a foreign company, the procedure is similar, save that with respect to the foreign
company, the director of the Cayman Islands company is required to make a declaration to the effect that, having made due enquiry, he
is of the opinion that the requirements set out below have been met: (i) that the merger or consolidation is permitted or not prohibited
by the constitutional documents of the foreign company and by the laws of the jurisdiction in which the foreign company is incorporated,
and that those laws and any requirements of those constitutional documents have been or will be complied
with; (ii) that no petition or other similar proceeding has been filed and remains outstanding or order made or resolution adopted
to wind up or liquidate the company in any foreign jurisdictions; (iii) that no receiver, trustee, administrator or other similar
person has been appointed in any jurisdiction and is acting in respect of the foreign company, its affairs or property or any part thereof;
(iv) that no scheme, order, compromise or similar arrangement has been entered into or made in any jurisdiction whereby the rights
of creditors of the foreign company are and continue to be suspended or restricted.
Moreover, Cayman Islands law also has separate statutory
provisions that facilitate the reconstruction or amalgamation of companies, in certain circumstances, schemes of arrangement will generally
be more suited for complex mergers or other transactions involving widely held companies, commonly referred to in the Cayman Islands as
a “scheme of arrangement” which may be tantamount to a merger. In the event that a merger was sought pursuant to a scheme
of arrangement (the procedure of which are more rigorous and take longer to complete than the procedures typically required to consummate
a merger in the United States), the arrangement in question must be approved by, if a shareholder scheme, shareholders representing three-fourths
in value of each class of shareholders with whom the arrangement is to be made or, if a creditor scheme, a majority in number of each
class of creditors with whom the arrangement is to be made, and who must in addition represent three-fourths in value of each such class
of creditors, as the case may be, that are present and voting either in person or by proxy at a meeting or meetings summoned for that
purpose. The convening of the meetings and subsequently the terms of the arrangement must be sanctioned by the Grand Court of the Cayman
Islands. While a dissenting shareholder would have the right to express to the court the view that the transaction should not be approved,
the court can be expected to approve the arrangement if it satisfies itself that:
| · | Afya is not proposing to act illegally or beyond the scope of its corporate authority and the statutory provisions as to majority
vote have been complied with; |
| · | the shareholders have been fairly represented at the meeting in question; |
| · | the arrangement is such as a businessman would reasonably approve; and |
| · | the arrangement is not one that would more properly be sanctioned under some other provision of the Companies Act or that would amount
to a “fraud on the minority.” |
If a scheme of arrangement or takeover offer (as described
below) is approved, any dissenting shareholder would have no rights comparable to appraisal rights, which would otherwise ordinarily be
available to dissenting shareholders of United States corporations, providing rights to receive payment in cash for the judicially determined
value of the shares.
Squeeze-out Provisions
When a takeover offer is made and accepted by holders
of 90.0% of the shares to whom the offer is made within four months, the offeror may, within a two-month period, require the holders of
the remaining shares to transfer such shares on the terms of the offer. An objection may be made to the Grand Court of the Cayman Islands
but is unlikely to succeed unless there is evidence of fraud, bad faith, collusion or inequitable treatment of the shareholders.
Further, transactions similar to a merger, reconstruction
and/or an amalgamation may in some circumstances be achieved through other means to these statutory provisions, such as a share capital
exchange, asset acquisition or control, through contractual arrangements, of an operating business.
Shareholders’ Suits
Maples and Calder (Cayman) LLP, our Cayman Islands counsel
is not aware of any reported class action having been brought in a Cayman Islands court. Derivative actions have been brought in the Cayman
Islands courts, and the Cayman Islands courts have confirmed the availability for such actions. In most cases, we will be the proper plaintiff
in any claim based on a breach of duty owed to us, and a claim against (for example) our officers or directors usually may not be brought
by a shareholder. However, based on English authorities, which would in all likelihood be of persuasive authority and be applied by a
court in the Cayman Islands, exceptions to the foregoing principle apply in circumstances in which:
| · | a company is acting or proposing to act illegally or beyond the scope of its authority; |
| · | the act complained of, although not beyond the scope of the authority, could be effected if duly authorized by more than the number
of votes which have actually been obtained; and |
| · | those who control the company are perpetrating a “fraud on the minority.” |
A shareholder may have a direct right of action against
us where the individual rights of that shareholder have been infringed or are about to be infringed.
Borrowing Powers
Our directors may exercise all the powers of Afya to
borrow money and to mortgage or charge its undertaking, property and assets (present and future) and uncalled capital or any part thereof
and to issue debentures, debenture stock, mortgages, bonds and other such securities whether outright or as security for any debt, liability
or obligation of Afya or of any third party. Such powers may be varied by a special resolution of shareholders (requiring a two-thirds
majority vote).
Indemnification of Directors and Executive Officers and
Limitation of Liability
The Companies Act does not limit the extent to which
a company’s articles of association may provide for indemnification of directors and officers, except to the extent that it may
be held by the Cayman Islands courts to be contrary to public policy, such as to provide indemnification against civil fraud or the consequences
of committing a crime. Our Articles of Association provide that we shall indemnify and hold harmless our directors and officers against
all actions, proceedings, costs, charges, expenses, losses, damages, liabilities, judgments, fines, settlements and other amounts incurred
or sustained by such directors or officers, other than by reason of such person’s dishonesty, willful default or fraud, in or about
the conduct of our company’s business or affairs (including as a result of any mistake of judgment) or in the execution or discharge
of his duties, powers, authorities or discretions, including without prejudice to the generality of the foregoing, any costs, expenses,
losses or liabilities incurred by such director or officer in defending (whether successfully or otherwise) any civil, criminal or other
proceedings concerning Afya or our affairs in any court whether in the Cayman Islands or elsewhere. This standard of conduct is generally
the same as permitted under the Delaware General Corporation Law for a Delaware corporation.
Insofar as indemnification for liabilities arising under
the Securities Act may be permitted to Our directors, officers or persons controlling the Company under the foregoing provisions, we have
been informed that, in the opinion of the SEC, this indemnification is against public policy as expressed in the Securities Act and is
therefore unenforceable.
Directors’ and Controlling Shareholders’
Fiduciary Duties
As a matter of Cayman Islands law, a director of a Cayman
Islands company is in the position of a fiduciary with respect to the company. Accordingly, directors and officers owe the following fiduciary
duties: (1) duty to act in good faith in what the director or officer believes to be in the best interests of the company as a whole;
(2) duty to exercise powers for the purposes for which those powers were conferred and not for a collateral purpose; (3) directors should
not improperly fetter the exercise of future discretion; (4) duty to exercise powers fairly as between different sections of shareholders;
(5) duty to exercise independent judgment; and (6) duty not to put themselves in a position in which there is a conflict between their
duty to the company and their personal interests. However, this obligation may be varied by the company’s articles of association,
which may permit a director to vote on a matter in which he has a personal interest provided that he has disclosed that nature of his
interest to the board of directors. With respect to the duty of directors to avoid conflicts of interest, our Articles of Association
vary from the applicable provisions of Cayman Islands law mentioned above by providing that a director must disclose the nature and extent
of his or her interest in any contract or arrangement, and following such disclosure and subject to any separate requirement under applicable
law or the listing rules of the Nasdaq, and unless disqualified by the chairman of the relevant meeting, such director may vote in respect
of any transaction or arrangement in which he or she is interested and may be counted in the quorum at the meeting.
A director of a Cayman Islands company also owes to
the company duties to exercise independent judgment in carrying out his functions and to exercise reasonable skill, care and
diligence, which has both objective and subjective elements. Recent Cayman Islands case law confirmed that directors must exercise
the care, skill and diligence that would be exercised by a reasonably diligent person having
the general knowledge, skill and experience reasonably to be expected of a person acting as a director.
Additionally, a director must exercise the knowledge,
skill and experience which he or she actually possesses.
A general notice may be given to the board of directors
to the effect that (i) the director is a member or officer of a specified company or firm and is to be regarded as interested in
any contract or arrangement which may after the date of the notice be made with that company or firm; or (ii) he or she is to be
regarded as interested in any contract or arrangement which may after the date of the notice to the board of directors be made with a
specified person who is connected with him or her, will be deemed sufficient declaration of interest. This notice shall specify the nature
of the interest in question. Following the disclosure being made pursuant to our Articles of Association and subject to any separate requirement
under applicable law or the listing rules of the Nasdaq, and unless disqualified by the chairman of the relevant meeting, a director may
vote in respect of any transaction or arrangement in which he or she is interested and may be counted in the quorum at the meeting.
In comparison, under Delaware corporate law, a director
of a Delaware corporation has a fiduciary duty to the corporation and its shareholders. This duty has two components: the duty of care
and the duty of loyalty. The duty of care requires that a director act in good faith, with the care that an ordinarily prudent person
would exercise under similar circumstances. Under this duty, a director must inform himself or herself of, and disclose to shareholders,
all material information reasonably available regarding a significant transaction. The duty of loyalty requires that a director act in
a manner he or she reasonably believes to be in the best interests of the corporation. He or she must not use his or her corporate position
for personal gain or advantage. This duty prohibits self-dealing by a director and mandates that the best interest of the corporation
and its shareholders take precedence over any interest possessed by a director, officer or controlling shareholder and not shared by the
shareholders generally. In general, actions of a director are presumed to have been made on an informed basis, in good faith and in the
honest belief that the action taken was in the best interests of the corporation. However, this presumption may be rebutted by evidence
of a breach of one of the fiduciary duties. Should such evidence be presented concerning a transaction by a director, a director must
prove the procedural fairness of the transaction, and that the transaction was of fair value to the corporation.
Furthermore, as a matter of Cayman Islands law and in
contrast to the position under Delaware corporate law, controlling shareholders of Cayman Islands companies do not owe fiduciary duties
to those companies, other than the limited duty that applies to all shareholders to exercise their votes to amend a company’s articles
of association in good faith in the interests of the company. The absence of this minority shareholder protection might impact the ability
of minority shareholders to protect their interests.
Shareholder Proposals
Under the Delaware General Corporation Law, a shareholder
has the right to put any proposal before the annual meeting of shareholders, provided it complies with the notice provisions in the governing
documents. The Delaware General Corporation Law does not provide shareholders an express right to put any proposal before the annual meeting
of shareholders, but Delaware corporations generally afford shareholders an opportunity to make proposals and nominations provided that
they comply with the notice provisions in the certificate of incorporation or bylaws. A special meeting may be called by the board of
directors or any other person authorized to do so in the governing documents, but shareholders may be precluded from calling special meetings.
The Companies Act provides shareholders with only limited
rights to requisition a general meeting and does not provide shareholders with any right to put any proposal before a general meeting.
However, these rights may be provided in a company’s articles of association. Our Articles of Association provide that upon the
requisition of one or more shareholders representing not less than one-third of the voting rights entitled to vote at general meetings,
the board will convene an extraordinary general meeting and put the resolutions so requisitioned to a vote at such meeting. The Articles
of Association provide no other right to put any proposals before annual general meetings or extraordinary general meetings.
Cumulative Voting
Under the Delaware General Corporation Law, cumulative
voting for elections of directors is not permitted unless the corporation’s certificate of incorporation specifically provides for
it.
Cumulative voting potentially facilitates the representation
of minority shareholders on a board of directors since it permits the minority shareholder to cast all the votes to which the shareholder
is entitled on a single director, which increases the shareholder’s voting power with respect to electing such director. As permitted
under Cayman Islands law, our Articles of Association do not provide for cumulative voting. As a result, the shareholders of Afya are
not afforded any less protections or rights on this issue than shareholders of a Delaware corporation.
Removal of Directors
The office of a director shall be vacated automatically
if, among other things, he or she (i) becomes prohibited by law from being a director, (ii) becomes bankrupt or makes an arrangement
or composition with his creditors, (iii) dies or is in the opinion of all his co-directors, incapable by reason of mental disorder
of discharging his duties as director, (iv) resigns his office by notice to us or (v) has for more than six months been absent
without permission of the directors from meetings of the board of directors held during that period, and the remaining directors resolve
that his/her office be vacated.
Transaction with Interested Shareholders
The Delaware General Corporation Law provides that, unless
the corporation has specifically elected not to be governed by this statute, it is prohibited from engaging in certain business combinations
with an “interested shareholder” for three years following the date that this person becomes an interested shareholder. An
interested shareholder generally is a person or a group who or which owns or owned 15% or more of the target’s outstanding voting
shares or who or which is an affiliate or associate of the corporation and owned 15% or more of the corporation’s outstanding voting
shares within the past three years. This has the effect of limiting the ability of a potential acquirer to make a two-tiered bid for the
target in which all shareholders would not be treated equally. The statute does not apply if, among other things, prior to the date on
which the shareholder becomes an interested shareholder, the board of directors approves either the business combination or the transaction
which resulted in the person becoming an interested shareholder. This encourages any potential acquirer of a Delaware corporation to negotiate
the terms of any acquisition transaction with the target’s board of directors.
Cayman Islands law has no comparable statute. As a result,
Afya cannot avail itself of the types of protections afforded by the Delaware business combination statute. However, although Cayman Islands
law does not regulate transactions between a company and its significant shareholders, it does provide that the board of directors owe
duties to ensure that these transactions are entered into bona fide in the best interests of the company and for a proper corporate purpose
and, as noted above, a transaction may be subject to challenge if it has the effect of constituting a fraud on the minority shareholders.
Dissolution; Winding Up
Under the Delaware General Corporation Law, unless the
board of directors approves the proposal to dissolve, dissolution must be approved by shareholders holding 100% of the total voting power
of the corporation. If the dissolution is initiated by the board of directors it may be approved by a simple majority of the corporation’s
outstanding shares. Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement
in connection with dissolutions initiated by the board. Under Cayman Islands law, a company may be wound up by either an order of the
courts of the Cayman Islands or by a special resolution of its members or, if the company resolves by ordinary resolution that it be wound
up because it is unable to pay its debts as they fall due. The court has authority to order winding up in a number of specified circumstances
including where it is, in the opinion of the court, just and equitable to do so.
Under the Companies Act, Afya may be dissolved, liquidated
or wound up by a special resolution of shareholders (requiring a two-thirds majority vote). Our Articles of Association also give its
board of directors authority to petition the Cayman Islands Court to wind up Afya.
Variation of Rights of Shares
Under the Delaware General Corporation Law, a corporation
may vary the rights of a class of shares with the approval of a majority of the outstanding shares of that class, unless the certificate
of incorporation provides otherwise. Under our Articles of Association, if the share capital is divided into more than one class of shares,
the rights attached to any class may only be varied with the written consent of the holders of two-thirds of the shares of that class
or the sanction of a special resolution passed at a separate meeting of the holders of the shares of that class.
Also, except with respect to share capital (as described
above), alterations to our Articles of Association may only be made by special resolution of shareholders (requiring a two-thirds majority
vote).
Amendment of Governing Documents
Under the Delaware General Corporation Law, a corporation’s
certificate of incorporation may be amended only if adopted and declared advisable by the board of directors and approved by a majority
of the outstanding shares entitled to vote, and the bylaws may be amended with the approval of a majority of the outstanding shares entitled
to vote and may, if so provided in the certificate of incorporation, also be amended by the board of directors. Under Cayman Islands law,
our Articles of Association generally (and save for certain amendments to share capital described in this section) may only be amended
by special resolution of shareholders (requiring a two-thirds majority vote).
Rights of Non-Resident or Foreign Shareholders
There are no limitations imposed by our Articles of Association
on the rights of non-resident or foreign shareholders to hold or exercise voting rights on our shares. In addition, there are no provisions
in the Articles of Association governing the ownership threshold above which shareholder ownership must be disclosed.
C. Material Contracts
For information concerning certain contracts important
to our business, see “Item 5. Operating and Financial Review and Prospects—B. Liquidity and Capital Resources” and “Item
4. Information on the Company—B. Business Overview—Our Recent Acquisitions.”
Except as otherwise described in this annual report on
Form 20-F, we have not entered into any material contracts other than in the ordinary course of business.
D. Exchange Controls
See “Item 3. Key Information—A. Selected
Financial Data—Exchange Rates.”
E. Taxation
Cayman Islands Tax Considerations
The Cayman Islands laws currently levy no taxes on individuals
or corporations based upon profits, income, gains or appreciation and there is no taxation in the nature of inheritance tax or estate
duty or withholding tax applicable to us or to any holder of Class A common shares. There are no other taxes likely to be material to
us levied by the government of the Cayman Islands except for stamp duties which may be applicable on instruments executed in, or after
execution brought within the jurisdiction of the Cayman Islands. No stamp duty is payable in the Cayman Islands on transfers of shares
of Cayman Islands companies except those which hold interests in land in the Cayman Islands. The Cayman Islands is not party to any double
tax treaties which are applicable to any payments made by or to our company. There are no exchange control regulations or currency restrictions
in the Cayman Islands.
As a Cayman Islands exempted company with limited liability,
we are entitled, upon application, to receive an undertaking as to tax concessions pursuant to Section 6 of the Tax Concessions Act (As
Revised). This undertaking would provide that, for a period of 20 years from the date of issue of the undertaking, no law thereafter enacted
in the Cayman Islands imposing any taxes to be levied on profits, income, gains or appreciation will apply to us or our operations.
Payments of dividends and capital in respect of our Class
A common shares will not be subject to taxation in the Cayman Islands and no withholding will be required on the payment of a dividend
or capital to any holder of our Class A common shares, nor will gains derived from the disposal of our Class A common shares be subject
to Cayman Islands income or corporation tax.
There is no income tax treaty or convention currently
in effect between the United States and the Cayman Islands.
U.S. Federal Income Tax Considerations
The following is a description of the material U.S. federal
income tax consequences to the U.S. Holders described below of owning and disposing of Class A common shares, but it does not purport
to be a comprehensive description of all tax considerations that may be relevant to a particular person’s decision to own the securities.
This discussion applies to you only if you hold Class A common shares as capital assets for U.S. federal income tax purposes. In addition,
it does not describe any state, local or non-U.S. tax consequences or all of the tax consequences that may be relevant in light of your
particular circumstances, including alternative minimum tax consequences, the potential application of the provisions of the Code known
as the Medicare contribution tax and tax consequences applicable to you if you are subject to special rules, such as:
| · | one of certain financial institutions; |
| · | a dealer or trader in securities who uses a mark-to-market method of tax accounting; |
| · | a person holding a Class A common shares as part of a straddle, wash sale, conversion transaction or integrated transaction or entering
into a constructive sale with respect to a Class A common share; |
| · | a person whose functional currency for U.S. federal income tax purposes is not the U.S. dollar; |
| · | an entity classified as partnerships for U.S. federal income tax purposes; |
| · | a tax-exempt entity, an “individual retirement account” or a “Roth IRA”; |
| · | a person who acquired our Class A common shares pursuant to the exercise of an employee stock option or otherwise as compensation; |
| · | a person that owns or is deemed to own ten percent or more of our stock (by vote or value); or |
| · | a person holding shares in connection with a trade or business conducted outside of the United States. |
If you are an entity classified as a partnership for
U.S. federal income tax purposes, the U.S. federal income tax treatment of a partner will generally depend on the status of the partner
and your activities. Partnerships holding Class A common shares and partners in such partnerships should consult their tax advisers as
to the particular U.S. federal income tax consequences of holding and disposing of the Class A common shares.
This discussion is based on the Internal Revenue Code
of 1986, as amended (the “Code”), administrative pronouncements, judicial decisions, and final, temporary and proposed Treasury
regulations all as of the date hereof, any of which is subject to change, possibly with retroactive effect.
You are a “U.S. Holder” if for U.S. federal
income tax purposes you are a beneficial owner of Class A common shares and:
| · | a citizen or individual resident of the United States; |
| · | a corporation created or organized in or under the laws of the United States, any state therein or the District of Columbia; or |
| · | an estate or trust the income of which is subject to U.S. federal income taxation regardless of its source. |
Taxation of Distributions
The following is subject to the discussion in “—Passive
Foreign Investment Company Rules” below.
As discussed above under “Item 8. Financial Information—Dividends
and Dividend Policy,” we do not currently intend to pay dividends. In the event that we pay dividends, distributions paid on our
Class A common shares, other than certain pro rata distributions of Class A common shares, will be treated as dividends for U.S.
federal income tax purposes to the extent paid out of our current or accumulated earnings and profits (as determined under U.S. federal
income tax principles). Because we do not maintain calculations of our earnings and profits under U.S. federal income tax principles, it is expected that distributions generally
will be reported to you as dividends. Subject to applicable limitations, dividends paid to certain non-corporate U.S. Holders may be eligible
for taxation as “qualified dividend income” and therefore may be taxable at rates applicable to long-term capital gains, provided
the Class A common shares are treated as readily tradeable on an established securities market in the United States. You should consult
your tax adviser regarding the availability of the reduced tax rate on dividends in your particular circumstances. The amount of any dividend
will be treated as foreign-source dividend income and will not be eligible for the dividends-received deduction generally available to
U.S. corporations under the Code. Dividends will be included in your income on the date of receipt.
As discussed in “—Cayman Island Tax Considerations,”
there are currently no applicable withholding taxes under Cayman Island law. However, if any non-U.S. income taxes were withheld from
distributions on your Class A common shares, the amount of the withheld tax would be includible in your income as a dividend. Subject
to applicable limitations, some of which vary depending upon your circumstances, the non-U.S. withholding tax may be potentially creditable
against your U.S. federal income tax liability. Recently issued Treasury regulations impose additional requirements for non-U.S. taxes
to be eligible for foreign tax credit, and we cannot assure you that any non-U.S. income taxes would be creditable against your U.S. federal
income tax liability. Subject to generally applicable limitations under U.S. law, you may be able to elect to deduct otherwise creditable
withholding taxes. Even if the non-U.S. withholding taxes are not creditable, you may be entitled to deduct such taxes, subject to applicable
limitations under the Code. The rules governing foreign tax credits are complex, and you should consult your tax adviser regarding the
creditability or deductibility of non-U.S. taxes, if any, in your particular circumstances (including any applicable limitations).
Sale or Other Disposition of Class A Common Shares
The following is subject to the discussion in “—Passive
Foreign Investment Company Rules” below.
For U.S. federal income tax purposes, gain or loss realized
on the sale or other disposition of a Class A common share will be capital gain or loss, and will be long-term capital gain or loss if
you have held the Class A common share for more than one year. The amount of the gain or loss will equal the difference between your tax
basis in the Class A common share disposed of and the amount realized on the disposition, in each case as determined in U.S. dollars.
This gain or loss will generally be U.S.-source gain or loss for foreign tax credit purposes. Long-term capital gains of non-corporate
U.S. Holders are eligible for reduced rates of taxation. The deductibility of capital losses is subject to limitations. If any non-U.S.
taxes were imposed on gains from dispositions of the Class A common shares, it is expected that those taxes would not be creditable against
your U.S. federal income tax liability. You should consult your tax adviser regarding the U.S. federal income tax consequences if any
non-U.S. income taxes were imposed on disposition gains.
Passive Foreign Investment Company Rules
Under the Code, we will be a PFIC for any taxable year
in which, after the application of certain “look-through” rules with respect to subsidiaries, either (i) 75% or more of our
gross income consists of “passive income,” or (ii) 50% or more of the average quarterly value of our assets consists of assets
that produce, or are held for the production of, “passive income.” For purposes of the above calculations, we will be treated
as if we hold our proportionate share of the assets of, and receive directly our proportionate share of the income of, any other corporation
in which we directly or indirectly own at least 25%, by value, of the shares of such corporation. Passive income generally includes dividends,
interest, certain non-active rents or royalties and investment gains. Cash is generally a passive asset for these purposes. Goodwill is
an active asset to the extent attributable to activities that produce active income.
Based on the composition of our income and assets and
the value of our assets, including goodwill (the implied value of which we estimate based on the price of our Class A common shares),
we believe that we were not a PFIC for the taxable year of 2022. However, because we hold a substantial amount of cash (relative to the
assets shown on our balance sheet) and because our PFIC status for any taxable year will depend on the composition of our income and assets
and the value of our assets from time to time (which may be determined, in part, by reference to the market price of our Class A common
shares, which could be volatile), there can be no assurance that we will not be a PFIC for any taxable year. If our Class A common share
price declines while we continue to hold a substantial amount of cash for any taxable year, our risk of being or becoming a PFIC will
increase. In addition, as we continue to expand our business through acquisitions and organically, our risk of becoming a PFIC will increase
if we engage in activities that generate substantial passive income. Moreover, the extent
to which our goodwill will be treated as an active asset is not entirely clear. If we were a PFIC for any taxable year during which you
hold Class A common shares, we generally would continue to be treated as a PFIC with respect to you for all succeeding years during which
you hold Class A common shares, even if we ceased to meet the threshold requirements for PFIC status.
If we were a PFIC for any taxable year and any of our
subsidiaries or other companies in which we owned or were treated as owning equity interests were also a PFIC (any such entity, a “Lower-tier
PFIC”), you would be deemed to own a proportionate amount (by value) of the shares of each Lower-tier PFIC and would be subject
to U.S. federal income tax according to the rules described in the subsequent paragraph on (i) certain distributions by a Lower-tier PFIC
and (ii) dispositions of shares of Lower-tier PFICs, in each case as if you held such shares directly, even though you would not receive
the proceeds of those distributions or dispositions.
If we were a PFIC for any taxable year during which you
held any of our Class A common shares, you could be subject to adverse tax consequences. Generally, gain recognized upon a disposition
(including, under certain circumstances, a pledge) of Class A common shares would be allocated ratably over your holding period for the
shares. The amounts allocated to the taxable year of disposition and to years before we became a PFIC would be taxed as ordinary income.
The amount allocated to each other taxable year would be subject to tax at the highest rate in effect for that taxable year for individuals
or corporations, as appropriate, and an interest charge would be imposed on the tax on such amount. Further, to the extent that distributions
received on your Class A common shares in a taxable year exceeded 125% of the average of the annual distributions on those shares during
the preceding three taxable years or your holding period, whichever was shorter, the excess distributions would be subject to taxation
in the same manner as gain, described immediately above.
Alternatively, if we were a PFIC and if the Class A common
shares were “regularly traded” on a “qualified exchange,” you could be eligible to make a mark-to- market election
that would result in tax treatment different from the general tax treatment for PFICs described above. The Class A common shares would
be treated as “regularly traded” in any calendar year in which more than a de minimis quantity of the Class A common
shares were traded on a qualified exchange on at least 15 days during each calendar quarter. The Nasdaq, on which the Class A common shares
are listed, is a qualified exchange for this purpose. Once made, the election cannot be revoked without the consent of the IRS unless
the shares cease to be marketable.
If you make the mark-to-market election, you generally
will recognize as ordinary income any excess of the fair market value of your Class A common shares at the end of each taxable year over
their adjusted tax basis, and will recognize an ordinary loss in respect of any excess of the adjusted tax basis of the Class A common
shares over their fair market value at the end of the taxable year (but only to the extent of the net amount of income previously included
as a result of the mark-to-market election). If you make the election, your tax basis in your Class A common shares will be adjusted to
reflect these income or loss amounts. Any gain recognized on the sale or other disposition of Class A common shares in a year when we
are a PFIC will be treated as ordinary income and any loss will be treated as an ordinary loss (but only to the extent of the net amount
of income previously included as a result of the mark-to-market election, with any excess treated as a capital loss). This election cannot
be made with respect to any of our subsidiaries the shares of which are not regularly traded. Accordingly, you may continue to be subject
to tax under the PFIC excess distribution regime with respect to any lower-tier PFICs notwithstanding your mark-to-market election for
the Class A common shares.
We do not intend to provide information necessary for
you to make a qualifying electing fund election which would result in alternative treatment.
In addition, if we were a PFIC for any taxable year in
which we paid a dividend or for the prior taxable year, the preferential dividend rates discussed above with respect to dividends paid
to certain non-corporate U.S. Holders would not apply.
If you own Class A common shares during any year in which
we are a PFIC, you generally must file annual reports on IRS Form 8621 (or any successor form) with respect to us, generally with your
federal income tax return for that year. A failure to file one or more of these forms as required may toll the running of the statute
of limitations in respect of each of your taxable years for which such form is required to be filed. As a result, the taxable years with
respect to which you fail to file the form may remain open to assessment by the IRS.
You should consult your tax adviser regarding whether
we are a PFIC and the potential application of the PFIC rules.
Information Reporting and Backup Withholding
Payments of dividends and sales proceeds that are made
within the United States or through certain U.S.-related financial intermediaries generally are subject to information reporting, and
may be subject to backup withholding, unless (i) you are a corporation or other exempt recipient or (ii) in the case of backup withholding,
you provide a correct taxpayer identification number and certify that you are not subject to backup withholding.
Backup withholding is not an additional tax. The amount
of any backup withholding from a payment to you will be allowed as a refund or credit against your U.S. federal income tax liability and
may entitle you to a refund, provided that the required information is timely furnished to the IRS.
Foreign Financial Asset Reporting
Certain U.S. Holders who are individuals (and certain
specified entities) may be required to report information relating to their ownership of Class A common shares, or non-U.S. accounts through
which Class A common shares are held. You should consult your tax adviser regarding your reporting obligations with respect to the Class
A common shares.
F. Dividends and Paying Agents
Not applicable.
G. Statement by Experts
Not applicable.
H. Documents on Display
We are subject to the informational requirements of the
Exchange Act applicable to foreign private issuers. Accordingly, we are required to file reports and other information with the SEC, including
annual reports on Form 20-F within four months from the end of each of our fiscal years, and reports on Form 6-K. You can read our SEC
filings over the Internet at the SEC’s website at www.sec.gov. You may also read and copy any document we file with the SEC at its
public reference room at 100 F. Street, N.E., Washington, D.C. 20549. You may obtain copies of these documents upon the payment of the
fees prescribed by the SEC. Please call the SEC at 1-800-SEC-0330 for further information about the public reference room.
I. Subsidiary Information
See note 2.2 to our audited consolidated financial statements
for a description of the Company’s subsidiaries.
J. Annual Report to Security
Holders
Not applicable.
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to market risks in the ordinary course
of our business, including the effects of interest rate changes and foreign currency fluctuations. We monitor market, credit and operational
risks in line with the objectives in capital management, supported by the oversight of our Board of Directors, in decisions related to
capital management and to ensure their consistency with our objectives and assessment of risks. Information relating to quantitative and
qualitative disclosures about these market risks is described below.
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.
The following table demonstrates the sensitivity to a
reasonably possible change in the current interest rates on cash equivalents, loans and financing, 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 rate, as follows:
|
Balance as of
December 31, 2022 |
Index –
% per year |
Base rate |
|
(amounts in R$ thousands, unless otherwise stated) |
Cash equivalents |
1,011,126 |
99.21% CDI |
136,928 |
Debentures |
(499,839) |
CDI + 1.80% |
(77,225) |
Loans and financing |
(518,134) |
CDI + 1.90% |
(80,570) |
Loans and financing |
(32,252) |
CDI + 1.75% |
(4,966) |
Loans and financing |
(8,418) |
TJLP |
(620) |
Accounts payable to selling shareholders |
(491,143) |
CDI |
(67,041) |
Notes payable |
(62,176) |
IPCA |
(3,600) |
Net exposure |
|
|
(97,094) |
|
Increase in basis
points |
|
+75 |
+150 |
|
(amounts in R$ thousands, unless otherwise stated) |
Effect on profit before tax |
(4,504) |
(9,010) |
For further information, see note 13.4.1 to our audited
consolidated financial statements included elsewhere in this annual report.
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. Our exposure to the risk of changes in
foreign exchange rates relates to cash and cash equivalents denominated in U.S. dollars in the amount of R$24.4 million as of December
31, 2022. See note 13.4.1 to our audited consolidated financial statements for a sensitivity analysis of the impact of a hypothetical
10% change in the exchange rate variation on our cash and cash equivalents as of December 31, 2022.
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. We are exposed to credit risk from
our operating activities (primarily trade receivables) and from our financing activities, including cash and cash equivalents and restricted
cash. We manage customer credit risk based on the established policy, procedures and control relating to customer credit risk management.
Outstanding customer receivables are regularly monitored. Credit risk from balances with banks and financial institutions is managed by
our treasury department in accordance with our policy. Investments of surplus funds are made only with approved counterparties and within
limits assigned to each counterparty.
Our maximum exposure to credit risk for the components
of the statements of financial position as of December 31, 2022 and 2021 is the carrying amounts of our financial assets. For more information,
see note 13.4.2 to our audited consolidated financial statements.
Liquidity Risk
Our management is responsible for monitoring liquidity
risk. To this end, 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 us arise from the need to make payments for suppliers, operating expenses, labor and social
obligations, loans and financing and accounts payable to selling shareholders.
For more information, see “Item 5. Operating and
Financial Review and Prospects—F. Tabular Disclosure of Contractual Obligations.”
ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
A. Debt Securities
Not applicable.
B. Warrants and Rights
Not applicable.
C. Other Securities
Not applicable.
D. American Depositary Shares
Not applicable.
The accompanying notes are an integral part of the consolidated financial
statements.
The accompanying notes are an integral part of the consolidated financial
statements.
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 in July 2019. Up to that date, 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 reflects the operations of Afya Brazil after the corporate reorganization.
The Company completed its initial public offering (IPO) on July 19, 2019, and its shares are listed on the Nasdaq under the symbol “AFYA.”
The Company is formed by a network of higher education and post-graduate
institutions focused on medicine located in 18 Brazilian states forming the largest educational group by the number of medical seats in
the country. In non-regulated education, Afya provides services that comprise the development and sale of electronically distributed educational
courses on medicine science, related printed and soft skills educational content. The Company also offers solutions to empower the physicians
in their daily routine including supporting clinic decisions through mobile app subscription, delivering practice management tools through
a SaaS (“Software as a Service”) model and supporting the patient-physician relationship.
On February 23, 2022, Afya announced that the Secretary of Regulation and
Supervision of Higher Education of the Ministry of Education (“MEC”) authorized the operations of the medical schools in Abaetetuba,
in the State of Pará, and Itacoatiara, in the State of Amazonas, both under Mais Médicos II program. With the authorizations,
Afya reaches its third and fourth authorized schools to start operating under the Mais Medicos II program. Each medical school will contribute
with 50 seats.
On March 16, 2022, MEC authorized the operations of the medical schools
in Bragança, in the State of Pará, and Manacapuru, in the State of Amazonas, both under Mais Médicos II program.
With the authorizations, Afya reaches its fifth and sixth authorized schools to start operating under the Mais Medicos II program. Each
medical school will contribute with 50 seats.
On March 18, 2022, Afya announced that MEC authorized the increase of 28
seats of Centro Universitário São Lucas, in Ji-Parana located in the state of Rondônia. The earn-out related to the
seats approval is R$800 per seat, adjusted by the Interbank Certificates of Deposit (“CDI” or “CDI rate”) rate
from the closing until the payment date, of which: (i) 50% was paid in April 2022, and (ii) 50% is payable in cash in two equal installments
through 2024.
On December 29, 2022, Afya announced that MEC authorized the increase of
64 medical seats of Faculdade Santo Agostinho, in the city of Itabuna, located in the state of Bahia. No additional commitment is required
regarding this authorization.
On March 10, 2020, the underwriters exercised their option to acquire additional
240,552 Class A common shares at the offering price, resulting in gross proceeds of US$ 6,615 thousand (R$ 30,884). The net proceeds from
the additional shares were US$ 6,387 thousand (R$ 29,819), after deducting U$ 228 thousand (R$ 1,066) in underwriting discounts and commissions.
On May 5, 2022, Afya was notified of the closing of the transaction where
Bertelsmann SE& Co. KGaA, or “Bertelsmann” acquired 6,000,000 Class B common shares of Afya at the purchase price of US$26.90
per share, from Nicolau Carvalho Esteves, Rosângela de Oliveira Tavares Esteves and NRE Capital Ventures Ltd (together with Nicolau
Carvalho Esteves and Rosângela de Oliveira Tavares Esteves, the “Esteves Family”). As a result of the closing of the
transaction, Bertelsmann and the Esteves family will beneficially own ~57.5% and ~33.0% voting interest, and ~31.0% and ~18.0% of
the total shares, respectively, in Afya. The transaction has no effect on Afya’s Consolidated financial statements.
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 some 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 non-practical 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. By the date of issuance of these financial statements all of the lockdown restrictions have been revoked by Brazilian authorities
in our campus locations and the Company has also successfully retaken all of its face to face operations.
During 2020, some of the Brazilian states issued decrees granting discounts
to our students because of COVID-19. These mandatory discounts have been suspended as their constitutionality has been challenged in the
superior courts.
On November 18, 2021, the Brazilian Federal Court of Justice (STF)
decided, by a majority of votes, that any lawsuit with decisions to apply linear discounts in monthly tuition fees for private universities
with respect to the COVID-19 pandemic are unconstitutional. Therefore, the Company shall not apply linear discounts on any active monthly
tuition fees that are related to the effects of the Covid-19 pandemic. Regarding the discounts granted by the date of issuance of these
financial statements, the Company is charging back the students as final legal decisions were given by the Brazilian Federal Court of
Justice.
As a result of the current geopolitical tensions and conflict between Russia
and Ukraine, and the recent recognition by Russia of the independence of the self-proclaimed republics of Donetsk and Luhansk in the Donbas
region of Ukraine, the governments of the United States, the European Union, Japan and other jurisdictions have recently announced the
imposition of sanctions on certain industry sectors and parties in Russia, Belarus and the regions of Donetsk and Luhansk, as well as
enhanced export controls on certain products and industries. These and any additional sanctions and export controls, as well as any counter
responses by the governments of Russia or other jurisdictions, could adversely affect, directly or indirectly, the global supply chain,
with negative implications on the availability of raw materials, energy prices, and our customers, as well as the local and global financial
markets and financial services industry and the global economy in general.
As of the date of these financial statements, the conflict between Russia
and Ukraine has not brought significant impact over Afya’s operations and results.
The Company’s consolidated financial statements have been prepared
in accordance with International Financial Reporting Standards (IFRS) as issued by the International Accounting Standards Board (IASB).
The consolidated financial statements have been prepared on a historical
cost basis, except for derivative financial instruments and contingent consideration (earn-outs) that have been measured at fair value.
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 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.
These consolidated financial statements as of and for the year ended December
31, 2022 were authorized for issue by the Board of Directors on March 20, 2023.
* See Note 5 for further details of the business combinations during 2022.
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.
This note provides a description of the significant accounting policies
adopted in the preparation of these consolidated financial statements in addition to other policies that have been disclosed in other
notes to these consolidated financial statements. These policies have been consistently applied to all periods presented.
The accounting policies have been consistently applied
to all consolidated companies.
Business combinations are accounted for using the acquisition method. The
cost of an acquisition is measured as the aggregate of the consideration transferred, which is measured at acquisition date fair value,
and the amount of any non-controlling interests in the acquiree. For each business combination, the Company elects whether to measure
the non-controlling interests in the acquiree at fair value or at the proportionate share of the acquiree’s identifiable net assets.
Acquisition-related costs are expensed as incurred and included in general and administrative expenses.
When the Company acquires a business, it assesses the financial assets and
liabilities assumed for appropriate classification and designation in accordance with the contractual terms, economic circumstances and
pertinent conditions as of the acquisition date.
Goodwill is initially measured at cost (being the excess of the aggregate
of the consideration transferred and the amount recognized for non-controlling interests and any previous interest held over the net identifiable
assets acquired and liabilities assumed). If the fair value of the net assets acquired is in excess of the aggregate consideration transferred,
the Company re-assesses whether it has correctly identified all of the assets acquired and all of the liabilities assumed and reviews
the procedures used to measure the amounts to be recognized at the acquisition date. If the reassessment still results in an excess of
the fair value of net assets acquired over the aggregate consideration transferred, then the gain is recognized in the consolidated statement
of income.
After initial recognition, goodwill is measured at cost less any accumulated
impairment losses. For the purpose of impairment testing, goodwill acquired in a business combination is, from the acquisition date, allocated
to each of the Company’s cash-generating units that are expected to benefit from the combination, irrespective of whether other
assets or liabilities of the acquire are assigned to those units.
Where goodwill has been allocated to a cash-generating unit (CGU) and part
of the operation within that unit is disposed of, the goodwill associated with the disposed operation is included in the carrying amount
of the operation when determining the gain or loss on disposal. Goodwill disposed in these circumstances is measured based on the relative
values of the disposed operation and the portion of the cash-generating unit retained.
The Company presents assets and liabilities in the statement of financial
position based on current/non-current classification. An asset is current when it is:
All other assets are classified as non-current.
The Company classifies all other liabilities as non-current.
Deferred tax assets and liabilities are classified as non-current assets
and liabilities.
Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based
on the presumption that the transaction to sell the asset or transfer the liability takes place either: (i) in the principal market for
the asset or liability; or (ii) in the absence of a principal market, in the most advantageous market for the asset or liability.
The principal or the most advantageous market must be accessible by the
Company.
The fair value of an asset or a liability is measured using the assumptions
that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest.
A fair value measurement of a non-financial asset takes into account a market
participant's ability to generate economic benefits by using the asset in its highest and best use or by selling it to another market
participant that would use the asset in its highest and best use.
The Company uses valuation techniques that are appropriate in the circumstances
and for which sufficient data are available to measure fair value, maximizing the use of relevant observable inputs and minimizing the
use of unobservable inputs.
All assets and liabilities for which fair value is measured or disclosed
in the financial statements are categorized within the fair value hierarchy, described as follows, based on the lowest level input that
is significant to the fair value measurement as a whole:
For assets and liabilities that are recognized in the financial statements
at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing
categorization (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting
period.
At each reporting date, the Company analyzes the movements in the values
of assets and liabilities which are required to be remeasured or re-assessed as per the Company’s accounting policies. For this
analysis, the Company verifies the major inputs applied in the latest valuation by agreeing the information in the valuation computation
to contracts and other relevant documents.
The Company also compares the change in the fair value of each asset and
liability with relevant external sources to determine whether the change is reasonable.
For the purpose of fair value disclosures, the Company has determined classes
of assets and liabilities on the basis of the nature, characteristics and risks of the asset or liability and the level of the fair value
hierarchy, as explained above.
A financial instrument is any contract that gives rise to a financial asset
of one entity and a financial liability or equity instrument of another entity.
The classification of financial assets at initial recognition
depends on the financial asset’s contractual cash flow characteristics and the Company’s business model for managing them.
With the exception of trade receivables that do not contain a significant financing component or for which the Company has applied the
practical expedient, the Company initially measures a financial asset at its fair value plus, in the case of a financial asset not at
fair value through profit or loss, transaction costs. Trade receivables that do not contain a significant financing component or for which
the Company has applied the practical expedient, are measured at the transaction price determined under IFRS 15.
In order for a financial asset to be classified and measured
at amortized cost or fair value through OCI (Other Comprehensive Income), it needs to give rise to cash flows that are “solely payments
of principal and interest (SPPI)” on the principal amount outstanding. This assessment is referred to as the SPPI test and is performed
at an instrument level.
The Company’s business model for managing financial assets
refers to how it manages its financial assets in order to generate cash flows. The business model determines whether cash flows will result
from collecting contractual cash flows, selling the financial assets, or both.
Purchases or sales of financial assets that require delivery
of assets within a time frame established by regulation or convention in the market place (regular way trades) are recognized on the trade
date, i.e., the date that the Company commits to purchase or sell the asset.
For purposes of subsequent measurement, financial assets are
classified as: financial assets at amortized cost or financial assets at fair value through profit or loss. There are no financial assets
designated as fair value through OCI.
The Company measures financial assets at amortized cost if both
of the following conditions are met:
• The financial asset is held within a business model with
the objective to hold financial assets in order to collect contractual cash flows, and
• The contractual terms of the financial asset give rise
on specified dates to cash flows that are solely payments of principal and interest on the principal amount outstanding.
Financial assets at amortized cost are subsequently measured
using the effective interest (EIR) method and are subject to impairment. Gains and losses are recognized in the statement of income when
the asset is derecognized, modified or impaired.
Financial assets at fair value through profit or loss include
financial assets held for trading, financial assets designated upon initial recognition at fair value through profit or loss, or financial
assets mandatorily required to be measured at fair value. Financial assets are classified as held for trading if they are acquired for
the purpose of selling or repurchasing in the near term. Derivatives, including separated embedded derivatives, are also classified as
held for trading unless they are designated as effective hedging instruments. Financial assets with cash flows that are not solely payments
of principal and interest are classified and measured at fair value through profit or loss, irrespective of the business model.
Financial assets at fair value through profit or loss are carried
in the statement of financial position at fair value with net changes in fair value recognized in the statement of income. This category
includes derivative instruments.
A financial asset (or, where applicable, a part of a financial
asset or part of a group of similar financial assets) is primarily derecognized (i.e., removed from the Company’s statement of financial
position) when:
• The Company has transferred its rights to receive cash
flows from the asset or has assumed an obligation to pay the received cash flows in full without material delay to a third party under
a ‘pass-through’ arrangement; and either (a) the Company has transferred substantially all the risks and rewards of the asset,
or (b) the Company has neither transferred nor retained substantially all the risks and rewards of the asset, but has transferred control
of the asset.
When the Company has transferred its rights to receive cash flows
from an asset or has entered into a pass-through arrangement, it evaluates if, and to what extent, it has retained the risks and rewards
of ownership. When it has neither transferred nor retained substantially all of the risks and rewards of the asset, nor transferred control
of the asset, the Company continues to recognize the transferred asset to the extent of its continuing involvement. In that case, the
Company also recognizes an associated liability. The transferred asset and the associated liability are measured on a basis that reflects
the rights and obligations that the Company has retained.
Continuing involvement that takes the form of a guarantee over
the transferred asset is measured at the lower of the original carrying amount of the asset and the maximum amount of consideration that
the Company could be required to repay.
Further disclosures relating to impairment of financial assets
are also provided in the following notes:
The Company recognizes an allowance for expected credit losses
(ECLs) for all debt instruments not held at fair value through profit or loss. ECLs are based on the difference between the contractual
cash flows due in accordance with the contract and the cash flows the Company expects to receive, discounted at an approximation of the
original effective interest rate. The expected cash flows will include cash flows from the sale of collateral held or other credit enhancements
that are integral to the contractual terms.
For trade receivables, the Company applies a simplified approach
in calculating ECLs. Therefore, the Company does not track changes in credit risk, but instead recognizes an allowance for credit losses
based on lifetime ECLs at each reporting date. The Company has established a provision matrix that is based on its historical credit loss
experience, adjusted for forward-looking factors specific to the debtors and the economic environment.
The Company considers a financial asset to be in default when
internal or external information indicates that the Company is unlikely to receive the outstanding contractual amounts in full before
considering any credit enhancements held by the Company. A financial asset is written off when there is no reasonable expectation of recovering
the contractual cash flows.
Financial liabilities are classified, at initial recognition,
as financial liabilities at fair value through profit or loss, loans and borrowings, payables, or as derivatives designated as hedging
instruments in an effective hedge, as appropriate.
All financial liabilities are recognized initially at fair value
and, in the case of loans and borrowings and payables, net of directly attributable transaction costs.
The Company’s financial liabilities include trade payables,
loans and financing, notes payable, lease liabilities, advances from costumers and accounts payable to selling shareholders.
The measurement of financial liabilities depends on their classification,
as described below:
Financial liabilities at fair value through profit or loss include
financial liabilities held for trading and financial liabilities designated upon initial recognition as at fair value through profit or
loss.
Financial liabilities are classified as held for trading if they
are incurred for the purpose of repurchasing in the near term. This category also includes, when applicable, derivative financial instruments
entered into by the Company that are not designated as hedging instruments in hedge relationships as defined by IFRS 9. Gains or losses
on liabilities held for trading are recognized in the statement of income.
Financial liabilities designated upon initial recognition at
fair value through profit or loss are designated at the initial date of recognition, and only if the criteria in IFRS 9 are satisfied.
After initial recognition, interest-bearing loans and borrowings
are subsequently measured at amortized cost using the EIR method. Gains and losses are recognized in the statement of income when the
liabilities are derecognized as well as through the EIR amortization process.
Amortized cost is calculated by considering any discount or premium
on acquisition and fees or costs that are an integral part of the EIR. The EIR amortization is included as finance expenses in the statement
of income.
A financial liability is derecognized when the obligation under
the liability is discharged or cancelled or expires. When an existing financial liability is replaced by another from the same lender
on substantially different terms, or the terms of an existing liability are substantially modified, such an exchange or modification is
treated as the derecognition of the original liability and the recognition of a new liability. The difference in the respective carrying
amounts is recognized in the statement of income.
Financial assets and financial liabilities are offset and the
net amount is reported in the statement of financial position if there is a currently enforceable legal right to offset the recognized
amounts and there is an intention to settle on a net basis, to realize the assets and settle the liabilities simultaneously.
Cash and cash equivalents in the statement of financial position comprise
cash at banks and on hand, and short-term financial investments with an original maturity of three months or less, which are subject to
an insignificant risk of changes in value.
For the purpose of the statement of cash flows, cash and cash equivalents
consist of cash and short-term financial investments, as they are considered an integral part of the Company’s cash management.
Restricted cash in the statement of financial position comprise of financial
investments in investment funds that serve as collateral for loan agreements and other commitments.
Inventories are valued at the lower of cost and net realizable value. The
costs of inventories are based on the average cost method and include costs incurred in the purchase of inventories and other costs incurred
in bringing them to their current location and condition. Costs of purchased inventory are determined after deducting any discounts and
recoverable taxes.
Property and equipment is stated at cost, net of accumulated depreciation
and accumulated impairment losses, if any.
Subsequent expenditures are capitalized only if it is probable that the
future economic benefits associated with the expenditure will flow to the Company.
Depreciation is calculated on a straight-line basis over the estimated useful
lives of the assets, as follows:
An item of property and equipment and any significant part initially recognized
is derecognized upon disposal or when no future economic benefit is expected from its use or disposal. Any gain or loss arising on the
derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included
in the statement of income when the asset is derecognized.
The residual values, useful lives and methods of depreciation of property
and equipment are reviewed at each financial year end and adjusted prospectively, if appropriate.
As from January 1, 2019, the determination of whether an arrangement is
(or contains) a lease is based on the substance of the arrangement at the inception of the contract. The arrangement is, or contains,
a lease if fulfilment of the arrangement is dependent on the use of a specific asset (or assets) and the arrangement conveys a right to
use the asset (or assets), even if that asset is (or those assets are) not explicitly specified in an arrangement.
The Company applies a single recognition and measurement approach for all
leases, except for short-term leases and leases of low-value assets. The Company recognizes lease liabilities to make lease payments and
right-of-use assets representing the right to use the underlying assets.
The Company recognizes right-of-use assets at the commencement date of the
lease (i.e., the date the underlying asset is available for use). Right-of-use assets are measured at cost, less any accumulated depreciation
and impairment losses, and adjusted for any remeasurement of lease liabilities. The cost of right-of-use assets includes the amount of
lease liabilities recognized, initial direct costs incurred, and lease payments made at or before the commencement date less any lease
incentives received. Unless the Company is reasonably certain to obtain ownership of the leased asset at the end of the lease term, the
recognized right-of-use assets are depreciated on a straight-line basis over the shorter of its estimated useful life and the lease term.
Right-of use assets are subject to impairment.
At the commencement date of the lease, the Company recognizes lease liabilities
measured at the present value of lease payments to be made over the lease term. The lease payments include fixed payments (including in-substance
fixed payments) less any lease incentives receivable, variable lease payments that depend on an index or a rate, and amounts expected
to be paid under residual value guarantees. The lease payments also include the exercise price of a purchase option reasonably certain
to be exercised by the Company and payments of penalties for terminating a lease, if the lease term reflects the Company exercising the
option to terminate. The variable lease payments that do not depend on an index or a rate are recognized as expense in the period on which
the event or condition that triggers the payment occurs.
In calculating the present value of lease payments, the Company uses the
incremental borrowing rate at the lease commencement date if the interest rate implicit in the lease is not readily determinable. After
the commencement date, the amount of lease liabilities is increased to reflect the accretion of interest and reduced for the lease payments
made. In addition, the carrying amount of lease liabilities is remeasured if there is a modification, a change in the lease term, a change
in the in-substance fixed lease payments or a change in the assessment to purchase the underlying asset.
The Company applies the short-term lease recognition exemption to its short-term
leases of properties (i.e., those leases that have a lease term of 12 months or less from the commencement date and do not contain a purchase
option). It also applies the lease of low-value assets recognition exemption to leases that are considered of low value. Lease payments
on short-term leases and leases of low-value assets are recognized as expense on a straight-line basis over the lease term.
Intangible assets acquired separately are measured on initial recognition
at cost. The cost of intangible assets acquired in a business combination is their fair value at the date of acquisition. Following initial
recognition, intangible assets are carried at cost less any accumulated amortization and accumulated impairment losses. Internally generated
intangibles are not capitalized and the related expenditure is reflected in the statement of income in the period in which the expenditure
is incurred.
The useful lives of intangible assets are assessed as finite or indefinite.
Intangible assets with finite lives are amortized over the useful economic
life and assessed for impairment whenever there is an indication that the intangible asset may be impaired.
The amortization period and the amortization method for an intangible asset
with a finite useful life are reviewed at least at the end of each reporting period. Changes in the expected useful life or the expected
pattern of consumption of future economic benefits embodied in the asset are considered to modify the amortization period or method, as
appropriate, and are treated as changes in accounting estimates. The amortization expense on intangible assets with finite lives is recognized
in the statement of income in the expense category that is consistent with the function of the intangible assets.
Intangible assets with indefinite useful lives are not amortized, but are
tested for impairment annually, either individually or at the cash-generating unit level. The assessment of indefinite life is reviewed
annually to determine whether the indefinite life continues to be supportable. If not, the change in useful life from indefinite to finite
is made on a prospective basis.
An intangible asset is derecognized upon disposal or when no future economic
benefits are expected from its use or disposal. Any gain or loss arising upon derecognition of the asset (calculated as the difference
between the net disposal proceeds and the carrying amount of the asset) is included in the statement of income.
The Company assesses, at each reporting date, whether there is an indication
that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates
the asset’s recoverable amount. An asset’s recoverable amount is the higher of an asset’s or CGU’s fair value
less costs of disposal and its value in use. The recoverable amount is determined for an individual asset, unless the asset does not generate
cash inflows that are largely independent of those from other assets or groups of assets. When the carrying amount of an asset or CGU
exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount.
In assessing value in use, the estimated future cash flows are discounted
to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks
specific to the asset. In determining fair value less costs of disposal, recent market transactions are considered. If no such transactions
can be identified, an appropriate valuation model is used. These calculations are corroborated by valuation multiples, quoted share prices
for publicly traded companies or other available fair value indicators.
The Company bases its impairment calculation on detailed budgets and forecast
calculations, which are prepared separately for each of the Company’s CGUs to which the individual assets are allocated. These budgets
and forecast calculations generally cover a period of five years, considering the companies activities and maturation period of its graduate
and undergraduate courses. A long-term growth rate is calculated and applied to project future cash flows after the last projected year.
For impairment testing, goodwill acquired through business combinations
and licenses with indefinite useful lives are allocated to their respective CGUs. The Company has defined each of its operating subsidiaries
as a CGU, except for digital services segment, which combines subsidiaries of (i) “Content & Technology for medical education”;
(ii) “Clinical Decision Software”; and (iii) “Practice Management Tools & Electronic Prescription”, where
the subsidiaries were combined as one CGU following the business strategic pillars.
Whenever applicable, impairment losses of continuing operations are recognized
in the statement of income in expense categories consistent with the function of the impaired asset.
For assets excluding goodwill, an assessment is made at each reporting date
to determine whether there is an indication that previously recognized impairment losses no longer exist or have decreased. If such indication
exists, the Company estimates the asset’s or CGU’s recoverable amount. A previously recognized impairment loss is reversed
only if there has been a change in the assumptions used to determine the asset’s recoverable amount since the last impairment loss
was recognized. The reversal is limited so that the carrying amount of the asset does not exceed its recoverable amount, nor exceed the
carrying amount that would have been determined, net of depreciation, had no impairment loss been recognized for the asset in prior years.
Such reversal is recognized in the statement of income.
Goodwill is tested for impairment annually as at December 31 and when circumstances
indicate that the carrying value may be impaired.
Impairment is determined for goodwill by assessing the recoverable amount
of each CGU (or group of CGUs) to which the goodwill relates. When the recoverable amount of the CGU is less than its carrying amount,
an impairment loss is recognized. Impairment losses relating to goodwill cannot be reversed in future periods.
Intangible assets with indefinite useful lives are tested for impairment
annually as at December 31 at the CGU level, as appropriate, and when circumstances indicate that the carrying value may be impaired.
Investments in associates are initially recognized at consideration transferred
and adjusted thereafter for the equity method, being increased or reduced from its interest in the investee's income after the acquisition
date. An associate is an entity over which the Company has significant influence. Significant influence is the power to participate in
the financial and operating policy decisions of the investee, but is not control or joint control over those policies.
These amounts represent liabilities related to the acquisitions made by
the Company which are not yet due. Accounts payable to selling shareholders are presented as current liabilities unless payment is not
due within 12 months after the reporting period. They are recognized initially at their fair value and subsequently measured at amortized
cost using the effective interest method.
Provisions are recognized when the Company has a present obligation (legal
or constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required
to settle the obligation, and a reliable estimate can be made of the amount of the obligation. The expense relating to a provision is
presented in the statement of income, net of any reimbursement, when applicable.
The Company recognizes a liability to pay a dividend when the distribution
is authorized and the distribution is no longer at the discretion of the Company. The distribution is authorized when it is required to
pay a minimum dividend of the net income for the year in accordance with the Brazilian Corporate Law (applicable for Afya Brazil) and
the Company’s By-Laws or is approved by the shareholders. A corresponding amount is recognized directly in equity.
Labor and social obligations are expensed as the related service is provided.
A liability is recognized for the amount expected to be paid if the Company has a present legal or constructive obligation to pay this
amount as a result of past service provided by the employee and the obligation can be estimated reliably.
Certain key executives of the Company receive remuneration in the form of
share-based payments, which includes Stock Options and Restricted Stock Units (“RSUs”), whereby the executives render services
as consideration for equity instruments (equity-settled transactions).
The expense of equity-settled transactions is determined by the fair value
at the date when the grant is made using an appropriate valuation model.
That expense is recognized in general and administrative expenses, together
with a corresponding increase in equity, over the period in which the service and, where applicable, the performance conditions are fulfilled
(the vesting period). The cumulative expense recognized for equity-settled transactions at each reporting date until the vesting date
reflects the extent to which the vesting period has expired and the Company’s best estimate of the number of equity instruments
that will ultimately vest. The expense or credit in the statement of income for a period represents the movement in cumulative expense
recognized as at the beginning and end of that period.
Service and non-market performance conditions are not considered when determining
the grant date fair value of awards, but the likelihood of the conditions being met is assessed as part of the Company’s best estimate
of the number of equity instruments that will ultimately vest. Market performance conditions are reflected within the grant date fair
value. Any other conditions attached to an award, but without an associated service requirement, are considered to be non-vesting conditions.
Non-vesting conditions are reflected in the fair value of an award and lead to an immediate expensing of an award unless there are also
service and/or performance conditions.
No expense is recognized for awards that do not ultimately vest because
non-market performance and/or service conditions have not been met. Where awards include a market or non-vesting condition, the transactions
are treated as vested irrespective of whether the market or non-vesting condition is satisfied, provided that all other performance and/or
service conditions are satisfied.
When the terms of an equity-settled award are modified, the minimum expense
recognized is the grant date fair value of the unmodified award, provided the original vesting terms of the award are met. An additional
expense, measured as at the date of modification, is recognized for any modification that increases the total fair value of the share-based
payment transaction, or is otherwise beneficial to the employee. Where an award is cancelled by the entity or by the counterparty, any
remaining element of the fair value of the award is expensed immediately through the statement of income.
The dilutive effect of outstanding options is reflected as additional share
dilution in the computation of diluted earnings per share.
The Company's revenue consists primarily of tuition fees charged for medical
courses. The Company also generates revenue from tuition fees for other undergraduate courses, student fees, certain education-related
activities, digital education content and subscription of digital services.
Revenues are recognized when services are rendered to the customer and the
performance obligation is satisfied.
Revenue from tuitions, digital education content and electronic medical
records are recognized over time when services are rendered to the customer and the Company satisfies its performance obligation under
the contract at an amount that reflects the consideration to which the Company expects to be entitled in exchange for those services.
Revenues from tuitions are recognized net of scholarships and other discounts, refunds and taxes.
Other revenues are recognized at a point in time when the service is rendered
to the customer at an amount that reflects the consideration to which the Company expects to be entitled in exchange for the service.
Other revenues are presented net of the corresponding discounts, returns and taxes.
Revenue from sale of printed books, e-books, healthcare payments, online
platforms and marketing for pharmaceutical industry are recognized at the point in time when control of the asset or services is transferred
to the customer, generally on delivery of the goods at the customer’s location and permission to access the digital content. The
Company considers whether there are other promises in the contract that are separate performance obligations to which a portion of the
transaction price needs to be allocated. In determining the transaction price for the printed books and e-books, the Company considers
the effects of variable consideration, financing component, noncash consideration, and consideration payable to the customer to be not
significant.
The Company has concluded that it is the principal in its revenue arrangements.
The Company assesses collectability on a portfolio basis prior to recording
revenue. Generally, students cannot re-enroll for the next academic session without satisfactory resolution of any past-due amounts. If
a student withdraws from an institution, the Company's obligation to issue a refund depends on the refund policy at that institution and
the timing of the student's withdrawal. Generally, the refund obligations are reduced over the course of the academic term.
Trade receivables represent the Company’s right to an amount of consideration
that is unconditional (i.e., only the passage of time is required before payment of the consideration is due). Refer to accounting policies
of financial assets in Financial instruments – initial recognition and subsequent measurement.
Advances from customers (a contract liability) are the obligation to transfer
services to a customer for which the Company has received consideration (or an amount of consideration is due) from the customer, as a
result of pre-paid tuition, digital education content and mobile app subscription for digital medical content received from customers
and is recognized separately in current liabilities, when the payment is received. Advances from customers are recognized as revenue when
the Company performs all obligations related to the contract, generally in the following month.
Current income tax assets and liabilities are measured at the amount expected
to be recovered from or paid to the taxation authorities. The tax rates and tax laws used to compute the amount are those that are enacted
or substantively enacted at the reporting date.
Management periodically evaluates positions taken in the tax returns with
respect to situations in which applicable tax regulations are subject to interpretation and establishes provisions where appropriate.
Own equity instruments that are reacquired (treasury shares) are recognized
at cost and deducted from equity. No gain or loss is recognized in profit or loss on the purchase, sale, issue or cancellation of the
Company’s own equity instruments. Any difference between the carrying amount and the consideration, if reissued, is recognized in
the share premium.
The following amendments apply for the first time in 2022, but there are
no significant impacts on the financial statements of the Company:
The new and amended standards and interpretations
that are issued, but not yet effective, up to the date of issuance of the Company’s financial statements are presented below. The
Group intends to adopt these new and amended standards and interpretations, if applicable, when they become effective.
The preparation of the Company’s consolidated financial statements
requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets and liabilities,
and the accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment
to the carrying amount of assets or liabilities affected in future periods. Accounting estimates and judgments are continually evaluated
and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under
the circumstances. Revisions to estimates are recognized prospectively.
Other disclosures relating to the Company’s exposure to risks and
uncertainties includes:
The key assumptions about the future and other key sources of estimated
uncertainty as of the reporting date that include a significant risk of a material adjustment to the carrying amounts of assets and liabilities
within the next financial year, are described below. The Company based its assumptions and estimates on parameters available when the
consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change
due to market changes or circumstances that arise and that are beyond the Company’s control. Such changes are reflected in the assumptions
when they occur.
Business combinations are accounted for using the acquisition method. Such
method requires recognizing and measuring the identifiable assets acquired, the liabilities assumed and any non-controlling interest in
the acquiree. The Company, as the acquirer, must classify or designate the identifiable assets and liabilities assumed on the basis of
its own contractual terms, economic conditions, operating and accounting policies and other relevant conditions as at the acquisition
date. Such assessment requires judgments from the Company on the methods used to determine the fair value of the assets acquired and liabilities
assumed, including valuation techniques that may require prospective financial information inputs.
Impairment exists when the carrying value of an asset or cash generating
unit (“CGU”) or group of CGUs exceeds its recoverable amount, defined as the higher of its fair value less costs of disposal
and its value in use. The fair value less costs of disposal calculation is based on data available from binding sales transactions, conducted
at arm’s length, for similar assets or observable market prices less incremental costs of disposing of the asset. The value in use
calculation is based on a discounted cash flow model (“DCF” model). The cash flows are derived from the budget for the next
five years and do not include restructuring activities to which the Company has not yet committed or significant future investments that
will enhance the performance of the assets of the CGU being tested. The recoverable amount is sensitive to the discount rate used for
the DCF model as well as to expected future cash-inflows and the growth rate used for extrapolation purposes.
These estimates are most relevant to goodwill and indefinite lived intangible
assets recognized by the Company. The key assumptions used to determine the recoverable amount for each CGU, including a sensitivity analysis,
are disclosed and further explained in Note 12.
Estimating fair value for share-based payment transactions requires determination
of the most appropriate valuation model, which depends on the terms and conditions of the grant. This estimate also requires determination
of the most appropriate inputs to the valuation model including the expected life of the share option or appreciation right, volatility
and dividend yield and making assumptions about them. For the measurement of the fair value of equity-settled transactions, the Company
uses the Binomial model. The assumptions and models used for estimating fair value for share-based payment transactions are disclosed
in Note 16 (b).
The Company cannot readily determine the interest rate implicit in the lease,
therefore, it uses its incremental borrowing rate (IBR) to measure lease liabilities. The IBR is the rate of interest that the Company
would have to pay to borrow over a similar term, and with a similar security, the funds necessary to obtain an asset of a similar value
to the right-of-use asset in a similar economic environment. The IBR therefore reflects what the Company ‘would have to pay’,
which requires estimation when no observable rates are available (such as for subsidiaries that do not enter into financing transactions)
or when they need to be adjusted to reflect the terms and conditions of the lease (for example, when leases are not in the subsidiary’s
functional currency).
The Company estimates the IBR using observable inputs (such as market interest
rates) when available and is required to make certain entity-specific estimates.
• Undergrad, which provides educational services
through undergraduate courses related to medicine, other health sciences and other undergraduate programs;
• Continuing Education, which provides specialization
programs and graduate courses in medicine; and
• Digital Services, which provides content and technology for medical
education, clinical decisions software, practice management tools (that encompass electronic medical records, telemedicine and digital
prescription for physicians), doctor-patient relationship and provides access, demand and efficiency for the healthcare players.
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.
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.
The following tables presents assets and liabilities information for the
Company’s operating segments as of December 31, 2022 and December 31, 2021, respectively:
The following tables present the statements of income for the Company’s
operating segments for the years ended December 31, 2022, 2021 and 2020:
Undergrad’s tuition revenues are related to the
enrollment process and monthly tuition fees charged to students over the period; thus, does not have significant fluctuations during the semester.
Continuing Education revenues are related to monthly intake and tuition fees and do not have a considerable concentration in any period.
Digital Services is comprised mainly of Medcel, Pebmed, and iClinic revenues. While Pebmed and iClinic do not have significant fluctuation
regarding seasonality, Medcel’s revenue is concentrated in the first and last quarter of the year due to the enrollments of Medcel’s
clients’ period. In addition, the majority of Medcel’s revenues are derived from printed books and e-books, which are recognized
at the point in time when control is transferred to the customer. Consequently, the Digital Services segment generally has higher revenues
and results of operations in the first and last quarters of the year than in the second and third quarters.
The fair values of the identifiable assets acquired and liabilities assumed
as of acquisition date were:
At the acquisition date, the fair value of the trade
receivables acquired equals its carrying amount.
The goodwill recognized includes the value of expected
synergies arising from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Digital Services segment.
The goodwill recognized is not expected to be deductible for income taxes purposes.
The Company did not recognize deferred taxes related
to the business combination because the tax basis and the accounting basis, including fair value adjustments, were the same at the date
of the business combination.
The valuation techniques used for measuring the fair value of separately
identified intangible assets acquired were as follows:
CardioPapers is the main medical content and education platform in the Cardiology
field, offering courses and books developed by physicians and for physicians, covering all phases of the medical career, aligned with
Afya's overall business strategy.
At the acquisition date, the fair value of the trade
receivables acquired equals its carrying amount.
The goodwill recognized includes the value of expected synergies arising
from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Digital Services segment. The goodwill recognized
is not expected to be deductible for income taxes purposes.
The Company did not recognize deferred taxes related
to the business combination because the tax basis and the accounting basis, including fair value adjustments, were the same at the date
of the business combination.
The valuation techniques used for measuring the fair value of separately
identified intangible assets acquired were as follows:
Glic is a free diabetes care and management app solution for physicians
and patients that uses technology to improve diabetes education and daily routine practices, connecting users, devices and healthcare
providers.
At the acquisition date, the fair value of the trade
receivables acquired equals its carrying amount.
The goodwill recognized includes the value of expected synergies arising
from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Digital Services segment. The goodwill recognized
is not expected to be deductible for income taxes purposes.
The Company did not recognize deferred taxes related
to the business combination because the tax basis and the accounting basis, including fair value adjustments, were the same at the date
of the business combination.
The valuation techniques used for measuring the fair value of separately
identified intangible assets acquired were as follows:
The fair values of the identifiable assets acquired and liabilities assumed
as of each acquisition date were:
(i) During the measurement period,
the goodwill for the acquisition of Unigranrio was adjusted by R$39,100 (R$130,073 initial goodwill) as a result of an increase of liabilities
regarding tax contingencies.
(ii) During the measurement period,
R$8,637 of goodwill (R$38,446 initial goodwill) arising from the acquisition of RXPRO was reduced, in connection with management’s
view of remote likelihood of RXPRO achieving the revenue goals stablished at the terms of the earn-out.
iClinic is a SaaS model physician focused technology
company and the leading medical practice management software in Brazil. iClinic empower doctors to be more independent and have more control
over their careers by digitalizing their daily routine, so they can increase their productivity and deliver better healthcare services.
With the acquisition of iClinic to our platform, Afya will make another step to become the one stop shop for physicians in Brazil.
The acquisition of iClinic was accounted for under
IFRS 3 – Business Combinations.
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 goodwill recognized includes the value of expected
synergies arising from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Digital Services segment.
The goodwill recognized is not expected to be deductible for income taxes purposes.
The valuation techniques used for measuring the fair value of separately
identified intangible assets acquired were as follows:
The acquisition will expand Afya’s digital health services, as it
offers a unique financial platform that allows healthcare professionals all over Brazil to manage receivables in an efficient and scalable
way using FIDC (Receivables Investment Fund).
Medicinae relieves a number of challenges in the healthcare payments industry,
as reduces long payment cycles for professionals and consolidates financial information, improving the consumer financial experience.
Afya’s intention is to grow the Digital Services segment.
The acquisition of Medicinae was accounted for under IFRS 3 – Business
Combinations.
At the acquisition date, the fair value of the trade receivables acquired
equals its carrying amount.
The goodwill recognized includes the value of expected synergies arising
from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Digital Services segment. The goodwill recognized
is not expected to be deductible for income taxes purposes.
The valuation techniques used for measuring the fair value of separately
identified intangible assets acquired were as follows:
This acquisition enables Afya to start providing a high quality solution
to study the human body, allowing efficient classes and remote practical sessions with greater student acceptance and scalability. Additionally,
Afya will be able to distribute Medical Harbour solutions to all of its ecosystem, creating B2C and B2B growth opportunities.
The acquisition of Medical Harbour was accounted for under IFRS 3 –
Business Combinations.
At the acquisition date, the fair value of the trade receivables acquired
equals its carrying amount.
The goodwill recognized includes the value of expected synergies arising
from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Digital Services segment. The goodwill recognized
is not expected to be deductible for income taxes purposes.
The valuation techniques used for measuring the fair value of separately
identified intangible assets acquired were as follows:
Users of Cliquefarma can easily search for medications or healthcare products
and compare prices from over 15,000 pharmacies in Brazil. The traffic generated is monetized through a cost-per-click model, where drugstores
pay for each click on their advertisements, a cost-per-acquisition, where drugstores pay for each concluded sale.
The acquisition of Cliquefarma will enhance the Digital Services segment,
creating the opportunity to leverage traffic and GMV with prescriptions generated from Afya’s physician ecosystem.
The acquisition of Cliquefarma was accounted for under IFRS 3 – Business
Combinations.
At the acquisition date, the fair value of the trade receivables acquired
equals its carrying amount.
The goodwill recognized includes the value of expected synergies arising
from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Digital Services segment. The goodwill recognized
is not expected to be deductible for income taxes purposes.
The valuation techniques used for measuring the fair value of separately
identified intangible assets acquired were as follows:
The acquisition of Shosp was accounted for under IFRS 3 – Business
Combinations.
At the acquisition date, the fair value of the trade receivables acquired
equals its carrying amount.
The goodwill recognized includes the value of expected synergies arising
from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Digital Services segment. The goodwill recognized
is not expected to be deductible for income taxes purposes.
The valuation techniques used for measuring the fair value of separately
identified intangible assets acquired were as follows:
UNIFIPMoc is a post-secondary education institution with government authorization
to offer on-campus, undergraduate courses in medicine in the states of Minas Gerais and Bahia. The acquisition is in line with the Company’s
strategy to focus on medical education, including medical school.
The acquisition of UNIFIPMoc was accounted for under IFRS 3 – Business
Combinations.
At the acquisition date, the fair value of the trade receivables acquired
equals its carrying amount.
The goodwill recognized includes the value of expected synergies arising
from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Undergrad segment. The goodwill recognized
is not expected to be deductible for income taxes purposes.
The valuation techniques used for measuring the fair value of separately
identified intangible assets acquired were as follows:
The valuation technique for property and equipment consists of determining
the fair value of an asset by using methodologies like replacement costs, market value, remaining useful life and physical depreciation.
Unigranrio 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 and Santa Catarina
The acquisition of Unigranrio was accounted for under IFRS 3 – Business
Combinations.
At the acquisition date, the fair value of the trade receivables acquired
equals its carrying amount.
The goodwill recognized includes the value of expected synergies arising
from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Undergrad segment. The goodwill recognized
is not expected to be deductible for income taxes purposes.
The valuation techniques used for measuring the fair value of separately
identified intangible assets acquired were as follows:
The valuation technique for property and equipment consists of determining
the fair value of an asset by using methodologies like replacement costs, market value, remaining useful life and physical depreciation.
The acquisition of RXPRO was accounted for under IFRS 3 – Business
Combinations.
At the acquisition date, the fair value of the trade receivables acquired
equals its carrying amount.
The goodwill recognized includes the value of expected synergies arising
from the acquisition, which is not separately recognized. Goodwill is allocated entirely to Digital Services segment. The goodwill recognized
is not expected to be deductible for income taxes purposes.
The valuation techniques used for measuring the fair value of separately
identified intangible assets acquired were as follows:
Cash equivalents correspond mainly to financial investments in Bank Certificates
of Deposit (“CDB”) with highly rated financial institutions and investments funds managed by highly rated financial institutions.
As of December 31, 2022, the average interest rate on these investments is equivalent to 99.21% of the CDI rate (December 31, 2021 - 100.38%).
These funds are available for immediate use and have insignificant risk of changes in value. Cash equivalents denominated in U.S. dollars
totaled R$24,447 as of December 31, 2022 (December 31, 2021: R$23,228).
As of December 31, 2022 and 2021, the aging of trade receivables was as
follows:
The changes in the allowance for doubtful accounts for the years ended December
31, 2022, 2021 and 2020, was as follows:
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 Araguaína and ITPAC Porto, pursuant to which RVL agreed to lease campuses to those entities
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 five years, and may be renewable for an additional
five years subject to the provisions of the lease agreement.
On September 6, 2018, RVL entered into a lease agreement
with ITPAC Araguaína, pursuant to which RVL agreed to lease to ITPAC the new ITPAC campus by RVL in the city of Palmas, State of
Tocantins. The lease agreement is for an amount equal to 7.5% of the monthly revenue of ITPAC during the prior semester, and will be effective
(and 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 and is renewable for an additional 20 years. As of December 31, 2022, the campus is fully operational.
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) from July 2020 until
March 2024, 6.5% of the monthly revenue of IPTAN during the prior semester, adjusted in accordance with the provisions of the lease agreement.
The lease agreement is for an initial term of 5 years starting when the campus becomes operational, and may be renewable for an additional
5 years subject to the provisions of the lease agreement. As of December 31, 2022, the campus is fully operational.
On August 02, 2021, RVL entered into a lease agreement with ITPAC Araguaína,
pursuant to which RVL agreed to lease to ITPAC the new ITPAC Garanhuns medical campus, in the city of Garanhuns, State of Pernambuco.
The lease agreement is for a monthly amount equal to (i) up to June 2022, R$40; (ii) from July 2022 until December 2028, 6.5% of the monthly
revenue of ITPAC Garanhuns during the prior semester, adjusted in accordance with the provisions of the lease agreement; and (iii) as
from January 2029, the monthly amount should be adjusted by the inflation rate (IPCA). The lease agreement is for a term of 20 years.
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$3,409, R$3,210
and R$2,915 in the years ended December 31, 2022, 2021 and 2020, respectively.
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 revenue of IESVAP until maturation.
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$4,920, R$4,560 and R$3,470 in the years ended December
31, 2022, 2021 and 2020, respectively.
Key management personnel compensation included in the Company’s consolidated
statement of income comprised the following:
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 costs of key management
personnel are shared by the Company’s subsidiaries in accordance with internal policies. The amounts disclosed in the table above
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 share-based compensation plans described
in Note 16(b).
As of December 31, 2022, the Company has R$243,501 (R$ 222,839 on December
31, 2021) accounted for as Other assets as follow:
The Company holds 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:
The Company tests at least annually the recoverability of the carrying amount
of goodwill. As of December 31, 2022 and 2022, no impairment had to be recognized for this goodwill.
Licenses with indefinite useful life include intangible assets acquired
through business combinations. The licenses for medicine and other courses granted by the Ministry of Education (“MEC”) to
the companies acquired have no expiration date and the Company has determined that these assets have indefinite useful lives.
For impairment testing goodwill and licenses with indefinite useful lives
acquired through business combinations are allocated to CGUs.
The Company performed its annual impairment test on December 31, 2022, 2021
and 2020.
The Company tests at least annually the recoverability of the carrying amount
of goodwill and licenses with indefinite useful lives for each CGU. The Company determines the recoverable amount of its CGUs based on
the value-in-use. The process of estimating these values involves the use of assumptions, judgments and estimates of future cash flows
that represent the Company's best estimate.
There was no impairment for goodwill and licenses with indefinite useful
lives as of December 31, 2022, 2021 and 2020.
The carrying amounts of goodwill and licenses with indefinite useful life
by CGU and their carrying amount as of December 31, 2022 and 2021 were as follows:
Pillar 1: during 2022, Além da Medicina and CardioPapers
were added to Content & Technology for medical education Pillar. Also, Medical Harbour joined Pillar 1 in 2022. Medcel has been disclosed
as Pillar’s predecessor. All of these entities are internally related and engaged on providing educational tools and technical medical
content for physicians throughout their careers. Products originally from each entity are often combined offered to our clients.
Pillar 3: During 2022, Cliquefarma was moved by management
from pillar “Practice Management Tools & Electronic Prescription” to a separate cash generating unit in connection with
an internal restructuring which results in segregation of the CGU.
Moc: the cash generating unit is composed by UnifipMoc
and ESMC legal entities, due to geographical characteristics and integration of the business, which was approved by the Board of Directors.
Perpetuity growth rate – refers to growth rate considered
by management on long term periods after the explicit projection period of 5 years. The growth rates ranges from 3% to 7.3%.
Intangible assets, other than goodwill and licenses with indefinite useful
lives, are valued separately for each acquisition and are amortized during each useful life. The useful lives and methods of amortization
of other intangibles are reviewed at each financial year end and adjusted prospectively, if appropriate.
For the years ended December 31, 2022, 2021 and 2020, there were no indicatives
that the Company’s intangible assets with finite useful lives might be impaired.
Financial instruments at amortized cost include trade receivables.
On September 28, 2022 Afya signed an amendment with Banco Itau Unibanco
S.A in order to extend its debt profile, postponing the original repayments dates from 2022 and 2023 to 2023, 2024 and 2025. Due to such
extension, the spread over CDI rate increased from 1.62% p.y to 1.90% p.y.
Each Series A perpetual convertible preferred share is entitled to a cash
dividend of 6.5% per annum and is convertible, at the holder’s discretion, into the Company’s Class A common shares at an
initial conversion price of US$25.35. The Company may require the conversion of any or all of the Series A perpetual convertible preferred
shares at any time on or after the three-year anniversary of the original issuance date if certain conditions set forth in the certificate
of designation are met (if for 20 out of 30 consecutive trading days prior, Afya’s stock price is equal or above 150% of the conversion
rate). The Company may also redeem any or all of the Series A perpetual convertible preferred shares for cash, shares of its common shares
or a combination thereof at its election, at any time on or after the seven-year anniversary of the original issuance date as determined
in the certificate of designation. On or after the five-year anniversary of the original issuance date, the holders of the Series A convertible
perpetual preferred shares shall have the right to redeem all of the outstanding Series A convertible perpetual preferred shares for cash,
the Company’s common shares or a combination thereof (at the Company’s election, subject to certain conditions) to be determined
in the certificate of designation. Upon the occurrence of a change of control, the holders will have the right to redeem their Series
A convertible perpetual preferred shares for cash at a price set forth in the certificate of designation.
The Series A convertible perpetual preferred shares will be entitled with
the same voting rights of the common shares only when converted into it.
The Company determined that the Series A perpetual convertible preferred
shares should be classified as financial liability at amortized cost upon their issuance since is redeemable primarily according to the
decision of the holder and there is a contractual obligation to deliver assets (cash, shares of its common shares or a combination thereof)
that could not be avoided by the Company in an event of redemption. The financial liability is denominated in Brazilian Reais and thus
not subject to foreign exchange changes.
In addition, as the entire instrument is classified as a liability, the
embedded put option to redeem the Series A perpetual convertible preferred shares for cash is an embedded derivative. The embedded derivative
will not be treated separately once the exercise price of the option is closely related to the host contract.
The initial transaction costs that are directly attributable to the issuance
of Series A perpetual convertible preferred shares were measured at fair value together with the financial liability on initial measurement.
The transaction costs totaled R$13,030, including legal counsels and advisors.
(e) On December 16, 2022, Afya announced the closing of the issuance, through
its wholly-owned subsidiary Afya Brazil, of 500,000 simple, non-convertible, unsecured debentures in a single series, each with a par
value of R$1, totaling an aggregate amount of R$500.000, by means of a public distribution with restricted placement efforts in the Brazilian
market, under the terms of the Brazilian Securities and Exchange Commission (“CVM”) Rule No. 476. Afya expects to use the
proceeds of the Offering for general corporate purposes, strengthening its cash position, and extending its debt maturity profile. The
Debentures were issued with a maturity date of January 15, 2028, with the principal to be amortized in two equal installments payable
on January 15, 2027 and January 15, 2028, corresponding to the fourth and fifth years of the transaction, respectively. The Debentures
bear interest at 100% of the CDI rate (the average of interbank overnight rates in Brazil, based on 252 business days) plus 1.80% per
year, payable semi-annually on January 15 and July 15 of each year, until the Maturity Date.
This transaction is subject to certain obligations including financial covenants.
According to this offering, Afya shall maintain net debt (excluding Softbank transaction and lease liabilities) to adjusted EBITDA ratio
below or equal to 3.0 x, at the end of each fiscal year, until maturity date. Adjusted EBITDA considers net income plus (i) income taxes
expenses, (ii) net financial result (excluding interest expenses on lease liabilities), (iii) depreciation and amortization expenses (excluding
right-of-use depreciation expenses), (iv) share-based compensation expenses, (v) share of income of associate, (vi) interest received
and (vii) non-recurring expenses. As of December 31, 2022, the Company is compliant with all obligations set forth in the deed of issuance.
The transaction costs that are directly attributable to the issuance of
debentures were measured at fair value together with the financial liability on initial measurement. The transaction costs totaled R$3,115,
including legal counsels and advisors.
The Company has lease contracts for properties. The lease contracts generally
have maturities in the lease terms between 5 and 30 years. There are no sublease or variable payments in-substance lease agreements in
the period.
The carrying amounts of right-of-use assets and lease liabilities as of
December 31, 2022 and December 31, 2021 and the movements during the years are described below:
The Company recognized lease expense from short-term leases and low-value
assets of R$12,153 for the year ended December 31, 2022 (R$11,229 and R$2,555 for the years ended December 31, 2021 and 2020, respectively).
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 of December 31, 2022, the notes payable of R$62,176 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 years ended December 31, 2022 and 2021:
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:
The Company assessed that the fair values of 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.
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 of the end of the
reporting period. The own non-performance risk at December 31, 2022 was assessed to be insignificant.
The Company’s principal financial liabilities
comprise loans and financing, lease liabilities, 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 and cash and cash equivalents.
The Company is exposed to market risk, credit risk and liquidity risk. The
Company monitors market, credit and liquidity 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 with policies for managing each of these risks, which are summarized below.
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 of December 31, 2022.
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, loans and financing, accounts
payable to selling shareholders and notes payable, with floating interest rates.
The following table demonstrates the sensitivity
to a reasonably possible change in interest rates on cash equivalents, 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: