 | Manuel Garciadiaz
manuel.garciadiaz@davispolk.com
| Davis Polk & Wardwell llp 450 Lexington Avenue New York, NY 10017 |
| October 27, 2022 | |
| Re: | Afya Limited Form 20-F for the Fiscal Year Ended December 31, 2021 Filed April 29, 2022 File No. 001-38992
|
U.S. Securities and Exchange Commission
Division of Corporation Finance
Office of Trade & Services
100 F Street, N.E.
Washington, D.C. 20549
| Attn: | Robert Shapiro |
| Lyn Shenk |
Ladies and Gentlemen:
On behalf of our client, Afya Limited (the “Company”), this letter sets forth the Company’s responses to the comments provided by the staff (the “Staff”) of the Division of Corporation Finance of the U.S. Securities and Exchange Commission (the “Commission”) in its letter dated October 13, 2022 (the “Comment Letter”). On April 29, 2022, the Company publicly filed an Annual Report on Form 20-F for the fiscal year ended December 31, 2021 (the “Annual Report”) via the Commission’s Electronic Data Gathering, Analysis and Retrieval system (“EDGAR”) to the Commission.
For the convenience of the Staff, each comment from the Comment Letter is restated in italics prior to the Company’s response to such comment. All references to page numbers and captions (other than those in the Staff’s comments) correspond to pages in the filed version of the Annual Report. We have also included our proposed changes that we expect to include in future filings in response to each of the Staff’s two comments as Exhibit A and Exhibit B hereto, respectively, as indicated below.
Form 20-F for the Fiscal Year Ended December 31, 2021
Item 3. Key Information
A. Selected Financial Data
Operating Data, page 11
| 1. | In the "Key Revenue Drivers" and "Key Operational Drivers" sections of your August 22, 2022 earnings release you provide more extensive operating data than disclosed in the "Operating Data" table in your annual report. To the extent this additional operating data is material to investors' understanding of your business, please consider revising to include the additional data. |
Response: The Company respectfully acknowledges the Staff’s comment and advises the Staff that, the Company intends to include such additional operating data in future filings of its annual reports, consistent with the information included in its August 22, 2022 earnings release. The
Company’s disclosure will be substantially consistent with the disclosures included in Exhibit A hereto.
Item 5. Operating and Financial Review and Prospects
A. Operating Results
Historical Consolidated Results of Operations, page 109
| 2. | Please revise to quantify factors to which changes are attributed. For example, you disclose the increase in revenue was primarily driven by: (i) organic revenue growth, mainly due to the maturation of medical school seats; (ii) consolidation of the results of operations of acquired companies in 2021 including two Mais Medicos campuses opened at the end of 2020, (iii) increase in the average ticket of Medical programs and, (iv) the fact that PEBMED has 12 months of net revenue in 2021, against approximately five months in 2020. Please also revise to discuss and analyze results of operations for each of your reportable segments. |
Response: The Company respectfully acknowledges the Staff’s comment and advises the Staff that, in future filings, the Company intends to include additional information to quantify factors to which changes are attributed and to discuss and to analyze results of operations for each of its reportable segments. The Company’s disclosure will be substantially consistent with the disclosures included in Exhibit B hereto.
* * *
The new or enhanced disclosures proposed above in items 1 and 2 will be included in our Form 20-F for the year ended December 31, 2022.
Please do not hesitate to contact me at +1-212-450-6095 or manuel.garciadiaz@davispolk.com or Elliot M. de Carvalho at +55-11-4871-8405 or elliot.decarvalho@davispolk.com if you have any questions regarding the foregoing or if I can provide any additional information.
Very truly yours,
/s/ Manuel Garciadiaz
Manuel Garciadiaz
| cc: | Virgilio Deloy Capobianco Gibbon, Chief Executive Officer, Afya Limited |
| Luis Andre Carpintero Blanco, Chief Financial Officer, Afya Limited |
Exhibit A
Set forth below is certain additional operating data on our key revenue drivers for our three reportable segments and key operational drivers for our Digital Services segment:
Key Revenue Drivers – Undergrad Segment
| As of and for the fiscal year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| UNDERGRAD SEGMENT | ||||||||||||
| Medical School | ||||||||||||
| Approved Seats | 2,731 | 2,143 | 1,572 | |||||||||
| Operating Seats | 2,481 | 1,893 | 1,222 | |||||||||
| Total Students (end of period) | 16,017 | 11,030 | 6,597 | |||||||||
| Average Total Students | 14,492 | 9,413 | 5,887 | |||||||||
| Average Total Students (ex-Acquisitions)(1) | 10,872 | 9,413 | 5,887 | |||||||||
| Tuition Fees (Total) (in R$ millions) | 1,511,442 | 910,966 | 550,208 | |||||||||
| Tuition Fees (ex-Acquisitions) (in R$ millions)(1) | 1,123,944 | 910,966 | 550,208 | |||||||||
| Medical School Gross Avg. Ticket (ex-Acquisitions)(R$/month)(1)(2) | 8,615 | 8,065 | 6,950 | |||||||||
| Medical School Net Avg. Ticket (ex-Acquisitions)(R$/month)(1)(3) | 6,433 | N/A | N/A | |||||||||
| Undergraduate Health Science | ||||||||||||
| Total Students (end of period) | 19,882 | 10,325 | 6,494 | |||||||||
| Average Total Students | 15,918 | 10,733 | 6,588 | |||||||||
| Average Total Students (ex-Acquisitions)(1) | 11,173 | 10,733 | 6,588 | |||||||||
| Tuition Fees (Total) (in R$ millions) | 239,512 | 152,539 | 98,488 | |||||||||
| Tuition Fees (ex-Acquisitions) (in R$ millions)(1) | 148,381 | 152,539 | 98,488 | |||||||||
| Other Undergraduate | ||||||||||||
| Total Students (end of period) | 25,219 | 14,851 | 10,878 | |||||||||
| Average Total Students | 20,198 | 14,087 | 10,613 | |||||||||
| Average Total Students (ex-Acquisitions)(1) | 10,734 | 14,087 | 10,613 | |||||||||
| Tuition Fees (Total)(in R$ millions) | 239,235 | 172,961 | 145,631 | |||||||||
| Tuition Fees (ex-Acquisitions)(in R$ millions)(1) | 147,239 | 172,961 | 145,631 | |||||||||
| Total Tuition Fees | ||||||||||||
| Tuition Fees (Total)(in R$ millions) | 1,990,189 | 1,236,466 | 794,327 | |||||||||
| Tuition Fees (ex-Acquisitions)(in R$ millions)(1) | 1,419,574 | 1,236,466 | 794,327 | |||||||||
| (1) | For the fiscal year ended December 31, 2021, “ex-Acquisitions” excludes: UniRedentor (only January 2021; Closing of UniRedentor was on January 31, 2020), UniSL (from January to April 2021; Closing of UniSL was in May 2020), FCMPB (from January to October 2021; Closing of FCMPB was in November 2020), FESAR (from January to October 2021; Closing of FESAR was in November 2020), UNIFIPMoc and FIPGuanambi (from June to December 2021; Closing of UNIFIPMoc and FIPGuanambi was in June 2021), UNIGRANRIO (from August to December 2021; Closing of UNIGRANRIO was in August 2021) and Garanhuns (from November to December 2021; Closing of Garanhuns was in November 2021). |
| (2) | 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. |
| (3) | 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 fiscal year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| CONTINUING EDUCATION SEGMENT | ||||||||||||
| Medical Specialization & Others | ||||||||||||
| Total Students (end of period) | 3,189 | 4,181 | 1,588 | |||||||||
| Average Total Students | 3,252 | 4,266 | 1,663 | |||||||||
| Average Total Students (ex-Acquisitions) | 3,064 | 4,266 | 1,663 | |||||||||
| Net Revenue (Total)(in R$ millions) | 72,983 | 107,196 | 60,193 | |||||||||
| Net Revenue (ex-Acquisitions)(in R$ millions)(1) | 70,822 | 107,196 | 60,193 | |||||||||
| (1) | For the fiscal year ended December 31, 2021, “ex-Acquisitions” excludes UniRedentor (only January 2021; Closing of UniRedentor was on January 31, 2020). |
Key Revenue Drivers – Digital Services Segment
| As of and for the fiscal year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| DIGITAL SERVICES SEGMENT | ||||||||||||
| Content & Technology for Medical Education | ||||||||||||
| Medcel Active Payers | ||||||||||||
| Prep Courses & CME - B2P | 17,171 | 11,316 | 9,577 | |||||||||
| Prep Courses & CME - B2B | 4,460 | 1,723 | 1,182 | |||||||||
| Além da Medicina Active Payers | — | — | — | |||||||||
| Cardio Papers Active Payers | — | — | — | |||||||||
| Medical Harbour Active Payers | — | — | — | |||||||||
| Clinical Decision Software | ||||||||||||
| Whitebook Active Payers | 125,372 | 106,977 | — | |||||||||
| Clinical Management Tools(2) | ||||||||||||
| iClinic Active Payers | 17,978 | — | — | |||||||||
| Shosp Active Payers | 2,305 | — | — | |||||||||
| Digital Services Total Active Payers (end of period) | 167,286 | 120,016 | 12,347 | |||||||||
| Net Revenue (Total)(in R$ millions) | 151,958 | 93,152 | 40,557 | |||||||||
| Net Revenue - B2P (in R$ millions) | 142,716 | — | — | |||||||||
| Net Revenue - B2B (in R$ millions) | 9,242 | — | — | |||||||||
| Net Revenue (ex-Acquisitions)(in R$ millions)(1) | 99,003 | 93,152 | 40,557 | |||||||||
| (1) | For the fiscal year ended December 31, 2021, “ex-Acquisitions” excludes: PEBMED (from January to July 2021; Closing of PEBMED was in July 2020), Medphone (from January to October 2021; Closing of Medphone was in November 2020), iClinic (from January to December 2021; Closing of iClinic was in January 2021), Medicinae (from March to December 2021; Closing of Medicinae was in March 2021), Medical Harbour (from April to December 2021; Closing of Medical Harbour was in April 2021), Cliquefarma (from April to December 2021; Closing of Cliquefarma was in April 2021), Shosp (from May to December 2021; Closing of Shosp was in May 2021) and RX PRO (from October to December 2021; Closing of RX PRO 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 fiscal year ended December 31, | ||||||||||||
| 2021 | 2020 | 2019 | ||||||||||
| DIGITAL SERVICES SEGMENT | ||||||||||||
| Content & Technology for Medical Education | 16,205 | 14,658 | — | |||||||||
| Clinical Decision Software | 194,308 | 162,512 | — | |||||||||
| Clinical Management Tools(1) | 37,030 | — | — | |||||||||
| Physician-Patient Relationship | — | — | — | |||||||||
| Total Monthly Active Users (MaU) - Digital Services(2) | 247,543 | 177,170 | — | |||||||||
| (1) | Clinical management tools include our telemedicine and digital prescription features. |
| (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. |
Exhibit B
Historical Consolidated Results of Operations
Year Ended December 31, 2021 Compared to the Year Ended December 31, 2020
The following table sets forth our historical consolidated income statement data for the years ended December 31, 2021 and 2020:
| For the Year Ended December 31, | ||||||||||||
| 2021 | 2020 | Variation (%) | ||||||||||
| (in R$ millions, except for percentages) | ||||||||||||
| Net revenue | 1,719.4 | 1,201.2 | 43.1 | % | ||||||||
| Cost of services | (652.3 | ) | (434.7 | ) | 50.1 | % | ||||||
| Gross profit | 1,067.1 | 766.5 | 39.2 | % | ||||||||
| General and administrative expenses | (622.6 | ) | (402.9 | ) | 54.6 | % | ||||||
| Other income (expenses), net | (3.6 | ) | (0.3 | ) | 926.2 | % | ||||||
| Operating income | 440.9 | 363.3 | 21.3 | % | ||||||||
| Finance income | 64.6 | 62.3 | 3.7 | % | ||||||||
| Finance expenses | (243.8 | ) | (98.3 | ) | 148.1 | % | ||||||
| Finance result | (179.2 | ) | (36.0 | ) | 398.2 | % | ||||||
| Share of income of associate | 11.8 | 7.7 | 53.2 | % | ||||||||
| Income before income taxes | 273.5 | 335.1 | (18.4 | )% | ||||||||
| Income taxes expense | (31.2 | ) | (27.1 | ) | 15.2 | % | ||||||
| Net income | 242.3 | 308.0 | (21.3 | )% | ||||||||
Net revenue
Net 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 net revenue was primarily affected by the following:
| · | In our Undergrad segment, net 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 net 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 net revenue; |
| · | In our Continuing Education segment, net 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, net 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 net revenue in 2021; and (ii) the fact that PEBMED had consolidated 12 months of net revenue in 2021, against approximately five months of net 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 net 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 net 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 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$61.6 million, or 18.4%, from R$335.1 million for the year ended December 31, 2020.
Income taxes expense
Income taxes expense 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$65.7 million, or 21.3%, from R$308.0 million for the year ended December 31, 2020.