Part I Key Information This section summarizes Oi S.A.'s selected financial data for 2017-2019, noting a significant 2019 net loss, and outlines major business, regulatory, operational, and economic risks Selected Financial Information The company reported a net loss of BRL 9,095 million in 2019, reversing 2018's profit from judicial reorganization gains, with declining revenue and no dividends since 2014 Consolidated Income Statement Data (2017-2019) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | | (in millions of BRL) | | | | Net operating revenue | BRL 20,136 | BRL 22,060 | BRL 23,790 | | Gross profit | 4,821 | 5,881 | 8,121 | | Operating income (loss) | (2,977) | (5,268) | (2,361) | | Financial expenses, net | (6,110) | 26,609 | (3,197) | | Net income (loss) | BRL (9,095) | BRL 24,616 | BRL (6,656) | | Net income (loss) per common ADS | BRL (7.57) | BRL 81.94 | BRL (47.10) | Consolidated Balance Sheet Data (as of Dec 31) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | | (in millions of BRL) | | | | Total current assets | 17,993 | 21,313 | 23,748 | | Total assets | 71,892 | 65,438 | 68,639 | | Total current liabilities | 11,836 | 10,689 | 67,892 | | Total liabilities | 54,095 | 42,542 | 82,152 | | Shareholders' equity | 17,797 | 22,896 | (13,513) | - The company has not paid any dividends or interest attributable to shareholders' equity since January 1, 201449 Risk Factors The company faces diverse risks including regulatory changes, restrictive debt covenants, legal proceedings, intense competition, COVID-19 impacts, Brazilian economic instability, and limitations on shareholder distributions - The Brazilian telecommunications industry is highly regulated by ANATEL. Changes in laws, regulations, or the imposition of new universal service obligations could adversely affect business operations and financial results55 - The company's debt instruments contain covenants that could restrict financing and operating flexibility. Failure to comply, particularly with BNDES financial ratios, could lead to debt acceleration. A waiver was obtained from BNDES for anticipated breaches as of March 31, 20207882 - The COVID-19 pandemic could materially affect business and operations, impacting network quality, sales channels, and customers' ability to pay. The full effect on the business and the Brazilian economy is unpredictable118120 - The company faces significant competition from other major providers like Claro, Telefônica Brasil, and TIM, as well as from OTT services (e.g., WhatsApp), which could negatively impact revenue and margins across all service segments109111117 - The company is subject to numerous legal and administrative proceedings. As of December 31, 2019, it had provisioned BRL 5,252 million for probable losses, with an additional BRL 30,882 million in claims where the risk of loss was deemed possible8889945 - Under the Judicial Reorganization (RJ) Plan, the company is prohibited from paying dividends or other distributions to shareholders until February 5, 2024, and thereafter only if certain financial ratios are met167 Information on the Company Oi S.A. is a major integrated Brazilian telecom provider undergoing judicial reorganization, focusing on FTTH expansion, wholesale fiber, and mobile business strategic alternatives, operating under ANATEL regulation Overview and Recent History Oi, a major Brazilian telecom provider with 53.4 million RGUs, has been in judicial reorganization since 2016, recently implementing a new strategic plan focused on FTTH, asset sales, and mobile business alternatives - As of December 31, 2019, Oi had approximately 53.4 million revenue generating units (RGUs), operating throughout Brazil180 - The company filed for judicial reorganization (RJ) in June 2016. The RJ Plan was approved by creditors in December 2017 and confirmed by the court in February 2018186187188 - In July 2019, Oi announced a new strategic plan focused on accelerating FTTH deployment, expanding wholesale operations, divesting non-core assets, and exploring strategic alternatives for its mobile business207208 - In January 2020, Oi sold its stake in PT Ventures for US$1 billion, and in February 2020, it sold a property in Botafogo for BRL 120.5 million as part of its non-core asset divestment strategy208211 - The company is seeking to amend the RJ Plan to gain flexibility for its strategic initiatives, including the potential sale of its mobile business, with a new general creditors' meeting expected to be held in 2020193195 Our Services Oi's services span Residential, Personal Mobility, and B2B segments, offering bundled fixed-line, broadband, and Pay-TV, data-centric mobile plans, and comprehensive corporate and wholesale solutions - Residential Services focus on bundled offerings (double, triple, quadruple-play) combining fixed-line voice, broadband (xDSL and FTTH up to 200 Mbps), Pay-TV, and mobile services223227233 - Personal Mobility Services are shifting from voice to data, with Oi Mais and Oi Livre plans offering large data allowances and unlimited calls. The company is focused on migrating users from 2G/3G to 4G236239 - B2B Services provide a comprehensive portfolio for corporate clients, including advanced data transmission (up to 100 Gbps), IT infrastructure services via Oi SmartCloud data centers, and wholesale services for other carriers245249250 Technology and Property, Plant & Equipment Oi's network relies on a 376,000 km fiber backbone, with significant FTTH investments reaching 4.6 million homes passed by 2019, and mobile network upgrades, reflecting BRL 7,813 million in 2019 capital expenditures - The company is executing a long-term program to upgrade its access network to Fiber-to-the-Home (FTTH) using GPON technology, reaching over 4.6 million homes passed and 675,000 homes connected by the end of 2019293 - As of December 31, 2019, the net book value of property, plant and equipment was BRL 38,911 million. Assets essential for providing fixed-line services are considered "reversible assets" and revert to ANATEL upon concession termination305306 Capital Expenditures (2017-2019) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | | (in millions of BRL) | | | | Data transmission equipment | BRL 2,947 | BRL 1,993 | BRL 1,846 | | Mobile network and systems | 905 | 820 | 602 | | Backbone transmission | 630 | 304 | 237 | | Total capital expenditures | BRL 7,813 | BRL 6,077 | BRL 5,629 | Regulation of the Brazilian Telecommunications Industry Oi's operations are regulated by ANATEL under public and private regimes, with new laws allowing concession conversion, and specific obligations for universal service, quality, and mobile network coverage, alongside regulated interconnection rates - Law No. 13,879, enacted in October 2019, allows fixed-line concessionaires to convert their public regime concessions into private regime authorizations, potentially eliminating burdensome obligations in exchange for new investments, primarily in broadband expansion365376 - The General Plan of Universal Service Goals (PGMU) sets network expansion and modernization obligations for public regime providers. The latest update in 2018 replaced some obligations (like maintaining public telephones) with requirements to build out backhaul and provide 4G wireless access in specified locations368371 - The company holds various authorizations for mobile services (2G, 3G, 4G) which include specific network coverage and quality of service obligations. Failure to meet these targets can result in fines or termination of licenses407412417 - ANATEL's General Plan on Competition Targets (PGMC) imposes stricter regulations on providers with significant market power, such as Oi, in areas like infrastructure sharing and wholesale pricing to promote competition463464 Operating and Financial Review and Prospects This section analyzes Oi's financial performance, highlighting a BRL 9.1 billion net loss in 2019 contrasting with 2018's profit, driven by judicial reorganization impacts, declining revenues, significant capital expenditures, and liquidity management Results of Operations Oi reported a BRL 9,095 million net loss in 2019, a reversal from 2018's profit driven by judicial reorganization gains, with an 8.7% revenue decline and significant impairment losses Consolidated Results of Operations (2018 vs 2019) | | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | | (in millions of BRL) | | | | Net operating revenue | BRL 20,136 | BRL 22,060 | (8.7)% | | Gross profit | 4,821 | 5,881 | (18.0)% | | Operating loss | (2,977) | (5,268) | (43.5)% | | Financial income (expenses), net | (6,110) | 26,609 | (123.0)% | | Profit (loss) | BRL (9,095) | BRL 24,616 | (136.9)% | - Net operating revenue from residential services fell 13.5% in 2019, driven by a 21.3% decline in fixed-line services revenue due to customer migration to mobile and a 9.8% drop in broadband revenue611613 - Personal mobility services revenue decreased by 3.2% in 2019, mainly due to a 42.6% drop in mobile interconnection revenue from tariff reductions and a decline in prepaid customers, partially offset by growth in the postpaid segment611618 - A significant impairment loss of BRL 2,111 million was recorded in 2019, primarily on regulatory licenses, due to a revised strategic plan and increased market competition640 - Net financial expenses were BRL 6,110 million in 2019, compared to a net financial income of BRL 26,609 million in 2018. The 2018 figure included substantial one-time gains from the debt restructuring under the RJ Plan, such as a BRL 13,290 million fair value adjustment and an BRL 11,055 million gain on restructuring648 Liquidity and Capital Resources Oi's liquidity is funded by operations, a 2019 capital increase, and asset sales, with cash and equivalents at BRL 2,082 million, significant capital expenditures, and contractual obligations totaling BRL 74,670 million, with dividend restrictions Consolidated Cash Flow Summary (2017-2019) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | | (in millions of BRL) | | | | Net cash generated in operating activities | BRL 2,312 | BRL 2,863 | BRL 4,402 | | Net cash used in investing activities | (6,851) | (4,917) | (4,422) | | Net cash generated (used) in financing activities | 2,236 | (424) | (692) | | Net decrease in cash and cash equivalents | (2,303) | (2,477) | (701) | | Cash and cash equivalents at end of year | BRL 2,082 | BRL 4,385 | BRL 6,863 | - In 2019, financing activities provided BRL 2,236 million in cash, primarily from the BRL 4.0 billion capital increase, which was partially offset by BRL 1,611 million in lease financing costs under the new IFRS 16 standard725 - Investing activities used BRL 6,851 million in cash in 2019, dominated by BRL 7,426 million in capital expenditures for property, plant, and equipment, mainly for network expansion723 Contractual Obligations as of December 31, 2019 | | Less than One Year | One to Three Years | Three to Five Years | More than Five Years | Total | | :--- | :--- | :--- | :--- | :--- | :--- | | | (in millions of BRL) | | | | | | Borrowings and financings | BRL 679 | BRL 3,312 | BRL 11,317 | BRL 27,113 | BRL 42,421 | | Lease liabilities | 1,510 | 4,224 | 2,474 | 7,275 | 15,483 | | Unconditional purchase obligations | 1,433 | — | — | — | 1,433 | | Total | BRL 4,123 | BRL 9,019 | BRL 14,565 | BRL 46,963 | BRL 74,670 | Directors, Senior Management and Employees This section details Oi's Board of Directors, executive officers, and Fiscal Council, noting 11 independent board members, 58,089 employees in 2019, BRL 64.5 million in compensation, and new share-based incentive plans - The Board of Directors is composed of up to 11 members, all of whom are independent. The current chairman is Eleazar de Carvalho Filho765769772 - The executive team is led by CEO Rodrigo Modesto de Abreu, who was appointed in January 2020. Other key officers include CFO Camille Loyo Faria and Chief Legal Officer Antonio Reinaldo Rabelo Filho, both appointed in October 2019791792 - As of December 31, 2019, Oi had 58,089 employees, with the largest groups in plant operations (36,149) and call center operations (15,046)827828 - Aggregate compensation for the board of directors, executive officers, and fiscal council was BRL 64.5 million in 2019. A new share-based long-term incentive plan for executives was approved and implemented, with an initial grant of 33.7 million common shares in December 2019815819821 - The company sponsors several pension plans, primarily managed by Fundação Sistel de Seguridade Social (Sistel) and Fundação Atlântico de Seguridade Social (FATL). As of December 31, 2019, the company recorded a net liability for pension benefits of BRL 633 million, mainly related to obligations under the TCSPREV plan830835843 Major Shareholders and Related Party Transactions Oi's major shareholders as of April 2020 include Brookfield, Solus, GoldenTree, and Bratel, with ownership shifts post-judicial reorganization, and related party transactions primarily involve associates like Hispamar Major Shareholders as of April 24, 2020 | Name | Common Shares | % of Common | Total Shares | % of Total | | :--- | :--- | :--- | :--- | :--- | | Brookfield Funds | 535,308,795 | 9.24% | 535,308,795 | 8.99% | | Solus Funds | 371,261,320 | 6.40% | 385,394,906 | 6.47% | | GoldenTree Funds | 317,881,347 | 5.48% | 317,881,347 | 5.34% | | Bratel S.à r.l. (Pharol) | 312,827,844 | 5.40% | 314,627,844 | 5.29% | - The shareholding structure has changed significantly, with GoldenTree reducing its stake from a high of 14.7% in April 2019 to 5.48% in April 2020868872 - The company has a call option agreement (PT Option Agreement) with Pharol, stemming from the 2014 Rio Forte commercial paper default. As of March 31, 2020, a significant portion of the option has lapsed unexercised883885 - Material related party transactions include leasing satellite transponders from Hispamar (19% owned by Oi), with expenses totaling BRL 203 million in 2019892 Financial Information This section details Oi's legal proceedings, with BRL 36.1 billion in estimated contingencies and BRL 5.3 billion provisioned, primarily for tax, civil, and labor claims, and notes dividend payments are suspended until February 2024 due to the RJ Plan - As of December 31, 2019, the company had provisions of BRL 5,252 million for legal proceedings where loss is probable. The total estimated amount for proceedings with probable or possible loss was BRL 36,134 million896 - Significant tax proceedings relate to Value-Added State Taxes (ICMS), with possible losses estimated at BRL 13,470 million, and FUST/FUNTTEL contributions, with possible losses of BRL 5,134 million903907 - Civil claims include administrative proceedings from ANATEL, for which BRL 570 million was provisioned, and claims related to historical financial interest agreements (PEX/PCT), with provisions of BRL 398 million917924 - The Judicial Reorganization (RJ) Plan prohibits the company from paying dividends or interest on shareholders' equity until February 5, 2024. After this date, payments are contingent on meeting a net debt to EBITDA ratio of less than or equal to 2:1948 The Offer and Listing Oi's shares trade on B3 and NYSE (Common ADSs), with Preferred ADSs on OTC, regulated by CVM, and listed on B3's Level 1 for enhanced corporate governance - The company's common shares (OIBR3) and preferred shares (OIBR4) trade on the B3 in Brazil. Common ADSs (OIBR.C) trade on the NYSE959 - The Brazilian securities markets are regulated by the CVM, the National Monetary Council, and the Brazilian Central Bank960 - Oi's shares are listed on the B3's Level 1 of Differentiated Corporate Governance Practices, requiring compliance with rules such as maintaining a 25% free float and stricter disclosure policies978 Additional Information This section details Oi's by-laws, material contracts, exchange controls, and taxation, including preferred share voting rights, tender offer rules, Brazilian tax on dividends and interest on equity, and U.S. tax considerations for ADSs and PFIC status - Due to the failure to pay the Minimum Preferred Dividend for three consecutive years, holders of Preferred Shares obtained full voting rights as of April 28, 20171018 - A change of control of Oi must be preceded by a public tender offer for all of the company's capital stock, in line with Novo Mercado rules1029 - Under Brazilian tax law, dividends paid from profits generated after January 1, 1996 are not subject to withholding tax for non-Brazilian holders. Interest on shareholders' equity is subject to a 15% withholding tax (or 25% for holders in 'Favorable Tax Jurisdictions')10711078 - For U.S. tax purposes, Oi believes it was not a Passive Foreign Investment Company (PFIC) for the 2019 taxable year, but believes it was a PFIC for 2018. This status affects the tax treatment of distributions and gains for U.S. holders1761123 Quantitative and Qualitative Disclosures About Market Risk Oi faces market risks from foreign currency and interest rates, with 52.2% of debt in foreign currencies, and uses derivatives and natural hedges to mitigate these exposures, focusing on cash flow and liquidity protection - The company is exposed to foreign exchange risk as a significant portion of its debt (52.2% as of Dec 31, 2019) and capital expenditures are denominated in or linked to foreign currencies, mainly the U.S. dollar11501152 - A hypothetical 10% depreciation of the Brazilian real would result in an approximate BRL 914 million loss on foreign currency monetary restatement of debt1152 - The company is exposed to interest rate risk as a significant portion of its real-denominated debt is tied to floating rates like CDI and TJLP. A hypothetical 100 basis point increase in interest rates would increase annual interest expense by approximately BRL 131 million11531156 - The company's hedging policy focuses on protecting cash flow and liquidity using instruments like non-deliverable forwards and natural hedges (holding U.S. dollar cash)11501157 Part II Controls and Procedures Management concluded that Oi's disclosure controls and internal control over financial reporting were effective as of December 31, 2019, having remediated a material weakness in related party transaction controls - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of December 31, 20191168 - Management concluded that the company's internal control over financial reporting was effective as of December 31, 2019, based on the COSO 2013 framework1172 - A material weakness identified in 2018 concerning controls over related party transactions was remediated as of December 31, 201911741175 Other Information This section covers governance, including the audit committee financial expert, code of ethics, BDO audit fees of BRL 10.0 million in 2019, and differences between Oi's corporate governance and NYSE standards - The Audit, Risks and Controls Committee has determined that Henrique José Fernandes Luz is the company's audit committee financial expert1177 Principal Accountant Fees (2018-2019) | | 2019 | 2018 | | :--- | :--- | :--- | | | (in millions of BRL) | | | Audit fees | BRL 5.2 | BRL 5.0 | | Audit-related fees | 4.4 | — | | All other fees | 0.4 | 0.3 | | Total fees | BRL 10.0 | BRL 5.3 | - The company relies on the general exemption in Rule 10A-3(c)(3) of the Exchange Act for foreign private issuers regarding audit committee listing standards, as Brazilian law reserves the power to appoint auditors to the full Board of Directors1184 - Significant differences exist between Oi's corporate governance and NYSE standards, particularly regarding the requirement for a majority of independent directors and the composition and charters of nominating and compensation committees118911901195 Part III Financial Statements This section presents Oi S.A.'s audited consolidated financial statements for 2019, prepared under IFRS, including the auditor's unqualified opinion with a going concern emphasis, and detailed notes on the judicial reorganization and accounting policies Report of Independent Registered Public Accounting Firm The auditor issued an unqualified opinion on Oi's 2019 financial statements and internal controls, but included a going concern emphasis due to judicial reorganization and recurring losses, highlighting several critical audit matters - The auditor issued an unqualified opinion on the consolidated financial statements and the effectiveness of internal control over financial reporting as of December 31, 201912301231 - A 'Going Concern' paragraph was included, noting that the company's operation under a Judicial Reorganization Plan and its recurring losses raise substantial doubt about its ability to continue as a going concern1243 - Critical Audit Matters highlighted by the auditor include: the going concern assessment, recoverability of long-term assets, provisions for tax and civil contingencies, recognition of unbilled revenue, accounting for federal tax credits, adoption of IFRS 16, and legal investigations1247 Notes to the Consolidated Financial Statements The notes detail the ongoing Judicial Reorganization, IFRS 16 adoption (BRL 8.2 billion in lease assets), BRL 5.3 billion in contingency provisions, debt structure changes, and subsequent events like the PT Ventures sale - The company is seeking to amend its Judicial Reorganization Plan (JRP) to achieve greater operational and financial flexibility to implement its strategic plan, with a new General Creditors' Meeting expected in 202013221323 - The adoption of IFRS 16 on January 1, 2019, resulted in the initial recognition of BRL 8,168 million in right-of-use assets and corresponding lease liabilities14371441 - As of Dec 31, 2019, total provisions for probable losses from legal and administrative proceedings amounted to BRL 5,252 million, with labor claims at BRL 2,051 million, civil at BRL 2,150 million, and tax at BRL 1,051 million1591 - In January 2020, the company completed the sale of its PT Ventures stake for a total of US$1 billion, a key part of its non-core asset divestment plan1753 - The company recognized approximately BRL 3 billion in federal tax credits in 2019 following final court decisions allowing the deduction of ICMS from the PIS/COFINS tax base15431544
Oi(OIBRQ) - 2019 Q4 - Annual Report