Oi(OIBRQ) - 2020 Q4 - Annual Report

Introduction Presentation of Financial and Other Information The company's IFRS financial statements, presented in Brazilian reais, reflect uncertainties from Judicial Reorganization and reclassified discontinued operations - The company's financial statements are prepared in accordance with IFRS, and its continuity as a going concern depends on the successful outcome of the Judicial Reorganization (RJ) Proceedings[14][15] Key Financial Indicators (as of Dec 31) | Indicator | 2020 (R$ million) | 2019 (R$ million) | | :--- | :--- | :--- | | Shareholders' Equity | 7,769 | 17,797 | | Loss for the year | (10,528) | (9,095) | | Working Capital | 15,782 | 6,157 | - Due to the strategic decision to dispose of certain assets (UPIs), the company reclassified these as discontinued operations and revised comparative financial statements for 2019 and 2018 under IFRS 5[17] - The company's Strategic Plan involves transforming into two separate entities: a consumer-focused company for fixed-line services and an infrastructure company with a neutral network focusing on fiber-optic expansion[21] Cautionary Statement Regarding Forward-Looking Statements Forward-looking statements are subject to significant risks and uncertainties, including Brazilian economic conditions, regulatory changes, and judicial reorganization - The report contains forward-looking statements subject to significant risks and uncertainties, and actual results may differ materially from expectations[39][40] - Key factors that could cause results to differ include economic and political conditions in Brazil, changes in telecommunications policies and ANATEL regulations, the outcome of the Judicial Reorganization Proceedings, intense competition, technological changes, and the full effect of the COVID-19 pandemic[41] Part I Item 1. Identity of Directors, Senior Management and Advisers This item is not applicable - Not applicable[44] Item 2. Offer Statistics and Expected Timetable This item is not applicable - Not applicable[45] Item 3. Key Information This section presents selected financial data for 2018-2020, revised for discontinued operations, and outlines various industry, company, and country risks Selected Financial Information Selected financial data for 2018-2020, revised for discontinued operations under the RJ Plan Amendment, shows no dividends paid since 2015 - Financial data for 2019 and 2018 has been revised to reclassify discontinued operations in line with IFRS 5, following the decision to dispose of certain assets under the RJ Plan Amendment[47] Selected Income Statement Data (in millions of reais) | | 2020 (R$ million) | 2019 (R$ million) | 2018 (R$ million) | | :--- | :--- | :--- | :--- | | Net operating revenue | 9,284 | 10,492 | 12,210 | | Gross profit | 2,013 | 2,510 | 3,042 | | Loss before financial income (expenses), net, and taxes | (1,811) | (3,367) | (6,764) | | Financial income (expenses), net | (12,275) | (5,377) | 26,691 | | Profit (loss) from continued operations | (10,535) | (8,731) | 23,220 | | Profit (loss) for the year | (10,528) | (9,095) | 24,616 | Selected Balance Sheet Data (as of December 31, in millions of reais) | | 2020 (R$ million) | 2019 (R$ million) | 2018 (R$ million) | | :--- | :--- | :--- | :--- | | Total current assets | 33,796 | 17,993 | 21,313 | | Total assets | 73,840 | 71,892 | 65,438 | | Total current liabilities | 18,014 | 11,836 | 10,689 | | Total liabilities | 66,070 | 54,095 | 42,542 | | Shareholders' equity | 7,770 | 17,797 | 22,896 | Risk Factors The company faces significant regulatory, company-specific, operational, and country risks, including those related to judicial reorganization, competition, and macroeconomic conditions - The Brazilian telecommunications industry is highly regulated by ANATEL, and adverse changes in regulations, non-compliance with concession obligations, or inability to renew concessions could negatively impact the business[56][57][59] - The company faces significant risks related to its Judicial Reorganization (RJ), including pending appeals on confirmation orders and the potential for further RJ Plan amendments if Strategic Plan goals, involving major asset sales, are not met[81][82][86] - Material weaknesses in internal control over financial reporting, specifically related to accounting for discontinued operations and impairment assessments, have been identified and not fully remediated[110][111] - The company faces intense competition from major players like Claro, Telefônica Brasil, and TIM, as well as OTT providers, eroding traditional revenue streams and pressuring market share and ARPU[114][115][122] - Significant financial risk arises from foreign currency exposure, with 66.7% of total consolidated borrowings and financing denominated in non-Brazilian real currencies as of December 31, 2020[148] - Under the RJ Plan, the company is prohibited from paying dividends or other distributions to shareholders until December 31, 2025, and thereafter only if a specific financial ratio (Net Debt/EBITDA <= 2) is met[163] Item 4. Information on the Company This section details the company's business, strategic transformation via Judicial Reorganization and asset divestment, continuing and discontinued operations, and the Brazilian telecommunications regulatory environment Overview and Recent History Oi is transforming its business into two separate entities via its Judicial Reorganization Plan, involving the creation and sale of five Isolated Production Units (UPIs) and the sale of PT Ventures - The company's Strategic Plan aims to transform its business into a consumer-focused fixed-line service company and a neutral network infrastructure company, focusing on fiber-optic expansion[179][203] - The Judicial Reorganization (RJ) Plan was amended and confirmed in October 2020, authorizing the formation of five Isolated Production Units (UPIs) for asset disposal: Mobile Assets, Towers, Data Center, InfraCo, and TVCo[179][191][192] - Significant asset sales have been agreed upon or completed: UPI Mobile Assets for R$16.5 billion, UPI Towers for approximately R$1.1 billion, and UPI Data Center for R$325 million[209][210][211] - A binding proposal from BTG Pactual/Globenet to acquire a 57.9% majority stake in UPI InfraCo for approximately R$12.9 billion has been accepted[212][213] - In January 2020, the company sold its stake in PT Ventures, including a 25% stake in Angola's Unitel, to Sonangol for US$1 billion[204] Continuing and Discontinued Operations The company's operations are split into continuing (Residential and B2B) and discontinued (five UPIs held for sale), with an overview of their services and technology - Continuing operations consist of Residential Services, including fixed-line voice and broadband, and B2B Services, offering fixed-line, broadband, and IT solutions for corporate and wholesale customers[227] - Discontinued operations, classified as held-for-sale, include UPI Mobile Assets, UPI InfraCo, UPI TVCo, and UPI Data Center, representing a strategic shift in operations[229][289] - The Personal Mobility business, part of UPI Mobile Assets, served 36.7 million subscribers as of December 31, 2020, holding a 15.8% market share in Brazil[293] - The company's fiber network (FTTH), a key strategic asset largely part of UPI InfraCo, reached 9.1 million homes passed with 2.1 million connected customers as of December 31, 2020[237][609] Capital Expenditures (in millions of reais) | | 2020 (R$ million) | 2019 (R$ million) | 2018 (R$ million) | | :--- | :--- | :--- | :--- | | Data transmission equipment | 4,033 | 2,947 | 1,993 | | Installation services and devices | 770 | 742 | 539 | | Mobile network and systems | 544 | 905 | 820 | | Total capital expenditures | 7,265 | 7,813 | 6,077 | Regulation of the Brazilian Telecommunications Industry The Brazilian telecommunications industry is regulated by ANATEL, with services under public or private regimes, and a 2019 law allowing concession conversion, covering service quality and competition - The industry is regulated by ANATEL, granting public regime concessions with stricter universal service and quality obligations, and private regime authorizations[376][380] - Law No. 13,879 (2019) allows fixed-line providers to convert public concessions into private authorizations, eliminating certain obligations for new investment commitments, with the conversion methodology still under ANATEL analysis[379][391] - The General Plan on Competition Targets (PGMC) imposes stricter rules on providers with significant market power, such as Oi, regarding infrastructure sharing and wholesale pricing to promote competition[482][483] - The company holds numerous radiofrequency spectrum authorizations for 2G, 3G, and 4G services, each with specific network coverage and service performance obligations monitored by ANATEL[433][439] - The company has roaming agreements with Iranian mobile operators and provides services to the Embassy of Iran in Brasilia, generating minor revenues and expenses in 2020[495][497] Item 5. Operating and Financial Review and Prospects This section analyzes the company's financial performance and condition, discussing factors affecting results, year-over-year comparisons, and an overview of liquidity and restructured indebtedness Results of Operations The company's 2020 net operating revenue from continuing operations decreased to R$9.3 billion, resulting in a R$10.5 billion consolidated net loss, primarily due to legacy service declines and higher financial expenses Consolidated Results of Operations (in millions of reais) | | 2020 (R$ million) | 2019 (R$ million) | % Change | | :--- | :--- | :--- | :--- | | Net operating revenue | 9,284 | 10,492 | (11.5)% | | Loss from continuing operations | (10,535) | (8,731) | 20.7% | | Profit (loss) from discontinued operations | 7 | (364) | (102.0)% | | Consolidated Loss | (10,528) | (9,095) | 15.8% | - The 11.5% decline in net operating revenue in 2020 was driven by a 21.1% drop in residential fixed-line services and a 12.2% drop in B2B services, partially offset by a 2.6% increase in broadband revenue fueled by 223% growth in fiber subscribers[627][631][633] - Net financial expenses increased by 128.3% to R$12.3 billion in 2020, primarily due to exchange rate losses on U.S. dollar-denominated debt following the 28.9% depreciation of the Brazilian real[625][661] - The significant profit in 2018 of R$24.6 billion was largely due to one-time gains from debt restructuring under the RJ Plan, including a R$13.3 billion fair value adjustment and an R$11.1 billion gain on restructuring[671][706] Liquidity and Capital Resources The company's liquidity, primarily from operating cash flows and asset sales, was R$4.1 billion in cash as of December 31, 2020, with future funding dependent on UPI sales and dividend payments restricted - As of December 31, 2020, the company had R$4.3 billion in consolidated cash, cash equivalents, and short-term investments[724] - Key sources of liquidity in 2020 were the US$1 billion sale of PT Ventures and a R$2.5 billion debenture issuance by Oi Mobile, with future liquidity heavily dependent on successful UPI sales[725][726] - The RJ Plan prohibits dividend payments until December 31, 2025, and thereafter only if the consolidated net debt to EBITDA ratio is below 2-to-1[717] Long-Term Indebtedness as of Dec 31, 2020 (in millions of reais) | Instrument | Outstanding Amount (R$ million) | | :--- | :--- | | PIK Toggle Notes | 9,000 | | Oi 12th issuance of debentures | 4,666 | | Telemar 6th issuance of debentures | 2,602 | | Oi Mobile debentures | 3,584 | | Restructured Export Credit Agreements | 8,825 | | Restructured BNDES credit agreements | 4,257 | | Total Gross Borrowings and Financing | 41,519 | | Fair value adjustment & costs | (15,175) | | Non-current Indebtedness (Net) | 25,919 | Item 6. Directors, Senior Management and Employees This section details the corporate governance structure, including the Board of Directors, Executive Officers, and Fiscal Council, outlines compensation policy and employee benefits, and reports 46,624 employees - The Board of Directors is composed of 11 independent members, with Eleazar de Carvalho Filho as Chairman and Marcos Grodetzky as Vice-Chairman[788][791] - The executive management team is led by CEO Rodrigo Modesto de Abreu and CFO Camille Loyo Faria[813] - Aggregate compensation for the board, executive officers, and fiscal council was R$73.3 million in 2020, with a long-term share-based incentive plan for executives in place[835][838][840] - As of December 31, 2020, the company had 46,624 employees from continuing and discontinued operations, with approximately 32.6% union members and good labor relations[847][848] - The company sponsors several complex defined benefit and defined contribution pension plans for its employees, managed by entities such as Sistel and Fundação Atlântico de Seguridade Social (FATL)[849][854] Item 7. Major Shareholders and Related Party Transactions This section identifies major shareholders, including Brookfield Funds and Bratel S.à r.l., notes the lapse of the PT Option, and describes material related party transactions Major Shareholders as of May 4, 2021 | Name | Common Shares | % of Common Outstanding | Total Shares | % of Total Outstanding | | :--- | :--- | :--- | :--- | :--- | | Brookfield Funds | 557,415,165 | 9.62% | 557,415,165 | 9.36% | | Bratel S.à r.l. (Pharol) | 314,490,159 | 5.43% | 314,490,159 | 5.28% | - The PT Option Agreement, granting Pharol an option to acquire Oi's shares from PTIF, lapsed unexercised on March 31, 2021[892] - Material related party transactions in 2020 included payments of R$202 million to joint venture Hispamar for satellite transponder leases and R$22 million to associate AIX for duct rentals[895][896] Item 8. Financial Information This section details legal proceedings, with R$37.0 billion in estimated contingencies and R$5.8 billion provisioned, and outlines the dividend policy, suspended by the Judicial Reorganization Plan - As of December 31, 2020, the company faced total estimated contingencies from legal proceedings of R$36,994 million, with provisions of R$5,810 million recorded for probable losses[899] - Significant tax proceedings relate to challenges over ICMS credits and the applicability of ISS, with possible losses estimated at R$13.5 billion and R$2.3 billion, respectively[905][907] - The company faces numerous administrative proceedings from ANATEL for alleged non-compliance with service quality (RGQ) and universal service (PGMU) targets, with provisions of R$1,264 million recorded for these claims[917][919] - The company's dividend policy is suspended, with the RJ Plan prohibiting dividend payments until December 31, 2025, and thereafter only if financial covenants are met, with no dividends paid since 2014[945][947][955] Item 9. The Offer and Listing This section details the trading markets for Oi's securities, including shares on B3 and ADSs on NYSE and OTC markets, along with an overview of Brazilian securities market regulation and corporate governance - The company's common shares (OIBR3) and preferred shares (OIBR4) trade on the B3 exchange, while Common ADSs (OIBR.C) trade on the NYSE, and Preferred ADSs (OIBRQ) are quoted on the OTC markets[958] - The Brazilian securities markets are regulated by the CVM and governed by laws such as the Brazilian Corporate Law, noted as not being as highly regulated or supervised as U.S. markets[960][962] - Oi's shares are listed on the B3's Level 1 of Differentiated Corporate Governance Practices, requiring adherence to enhanced disclosure and corporate governance rules beyond standard Brazilian law[977] Item 10. Additional Information This section provides supplementary corporate and legal information, detailing key provisions of Oi's by-laws, Brazilian exchange controls, foreign investment regulations, and significant tax implications for shareholders - Oi's by-laws stipulate that preferred shares are generally non-voting but acquire full voting rights if the minimum preferred dividend is not paid for three consecutive years, a condition met in April 2017[999][1020] - A change of control requires the acquirer to make a public tender offer for all of Oi's capital stock to ensure equitable treatment for all shareholders, in line with Novo Mercado rules[1030] - Foreign investment in Oi's shares is primarily governed by Resolution No. 4,373, allowing registered non-Brazilian holders to remit dividends and sales proceeds abroad and potentially affording favorable tax treatment[1046][1050] - For U.S. Holders, Oi believes it was not a Passive Foreign Investment Company (PFIC) for the 2020 tax year, but its status is determined annually, and a decline in share value could result in PFIC classification, leading to adverse U.S. tax consequences[172][1118] Item 11. Quantitative and Qualitative Disclosures about Market Risk The company is exposed to market risks from foreign currency exchange rates and interest rates, primarily due to U.S. dollar-denominated debt, managed through non-deliverable forwards and U.S. dollar cash reserves - The company is exposed to foreign currency risk as a significant portion of its debt and equipment costs are U.S. dollar-denominated[1134] - Hedging strategies include using non-deliverable forwards (NDFs) and maintaining U.S. dollar cash reserves as a natural hedge against currency fluctuations[1135][1136] Item 12. Description of Securities Other Than Equity Securities This section details fees associated with the company's American Depositary Shares (ADSs), including issuance, cancellation, and cash distribution fees, and notes US$3 million in reimbursements received - Holders of ADSs are subject to fees for issuance, cancellation, and cash distributions, typically up to US$5.00 per 100 ADSs for issuance/cancellation and US$0.02 per ADS for cash distributions[1139] - The company received US$3 million in reimbursements from the ADS depositary in 2020 for program-related expenses[1142] Part II Item 15. Controls and Procedures Management concluded that disclosure controls and procedures were ineffective as of December 31, 2020, due to material weaknesses in internal control over financial reporting, leading to an adverse auditor opinion - Management concluded that disclosure controls and procedures were not effective as of December 31, 2020, due to material weaknesses in internal control over financial reporting[1150] - Two material weaknesses were identified: controls failed to ensure data integrity for discontinued operations and were ineffective over the reasonableness of inputs for impairment analysis[1156][1161] - Remediation actions include implementing additional control procedures to verify data for discontinued operations and to assess inputs for the discount rate used in impairment analysis[1157][1162] - The independent registered public accounting firm, BDO RCS Auditores Independentes S.S., issued an adverse opinion on the effectiveness of the company's internal control over financial reporting as of December 31, 2020[1156] Item 16. Corporate Governance and Other Matters This section covers corporate governance, identifying Henrique José Fernandes Luz as the audit committee financial expert, detailing fees paid to BDO, and disclosing differences from NYSE standards - The Audit, Risks and Controls Committee includes a designated financial expert, Henrique José Fernandes Luz[1159] Principal Accountant Fees (in millions of reais) | Fee Type | 2020 (R$ million) | 2019 (R$ million) | | :--- | :--- | :--- | | Audit fees | 5.2 | 5.2 | | Audit-related fees | 0.7 | 4.4 | | All other fees | — | 0.4 | | Total fees | 5.9 | 10.0 | - The company relies on the general exemption in Rule 10A-3(c)(3) of the Exchange Act, as Brazilian law requires the full board of directors to appoint and oversee the independent auditor[1169] - Significant differences exist between Oi's governance practices and NYSE standards, particularly concerning the requirement for a majority of independent directors and the composition of nominating and compensation committees[1176][1177][1182] Part III Item 18. Financial Statements This section presents the company's audited consolidated financial statements for 2018-2020, prepared under IFRS, including the independent auditor's report with an unqualified opinion on financials but an adverse opinion on internal controls - The independent auditor's report expresses an unqualified opinion on the financial statements but notes a material uncertainty regarding the company's ability to continue as a going concern due to recurring losses and its Judicial Reorganization Plan[1228][1230] - The auditor's report identifies critical audit matters, including the going concern assessment, recoverability of long-term assets, provisions for tax and civil contingencies, recoverability of deferred tax assets, and accounting for discontinued operations under the JRP amendment[1234] Consolidated Balance Sheet Summary (as of Dec 31, 2020, in thousands of R$) | | Amount (R$ thousands) | | :--- | :--- | | Total Assets | 73,839,787 | | Current Assets | 33,795,738 | | Non-current Assets | 40,044,049 | | Total Liabilities | 66,069,877 | | Current Liabilities | 18,013,108 | | Non-current Liabilities | 48,056,769 | | Total Shareholders' Equity | 7,769,910 | Consolidated Statement of Operations Summary (Year ended Dec 31, 2020, in thousands of R$) | | Amount (R$ thousands) | | :--- | :--- | | Net operating revenue | 9,284,303 | | Loss from continuing operations | (10,535,739) | | Profit from discontinued operations | 7,240 | | Profit (loss) for the year | (10,528,499) | Item 19. Exhibits This section lists exhibits filed as part of the annual report, including the company's by-laws, ADS deposit agreements, the Judicial Reorganization Plan, regulatory agreements, and CEO/CFO certifications - The report includes key corporate documents as exhibits, such as the company's by-laws, ADS deposit agreements, and the Judicial Reorganization Plan[1199] - Regulatory agreements, including concession and authorization agreements for various telecommunication services, are also filed as exhibits[1201]