Oi(OIBZQ) - 2021 Q3 - Quarterly Report

Company Overview and Judicial Reorganization Company Data and Capital Breakdown As of September 30, 2021, Oi S.A.'s capital structure consisted of approximately 5.95 billion total shares, comprising 5.80 billion common shares and 157.7 million preferred shares, with about 1.84 million shares held in treasury Capital Breakdown as of 09/30/2021 | Share Type | Paid-in Capital (thousands) | In Treasury (thousands) | | :--- | :--- | :--- | | Common shares | 5,796,478 | 30 | | Preferred shares | 157,727 | 1,812 | | Total | 5,954,205 | 1,842 | Judicial Reorganization and Strategic Plan Oi S.A. operates under a Judicial Reorganization Plan (JRP) initiated in 2016, with a 2020 amendment providing financial flexibility through asset sales and a strategic focus on fiber optics and digital solutions, with court supervision extended to March 31, 2022 - The company filed for judicial reorganization on June 20, 2016, with the plan approved and ratified in late 2017 and early 2018[45][46][47] - An amendment to the JRP was approved at a New General Creditors' Meeting on September 8, 2020, and ratified by the court on October 5, 2020, crucial for implementing the company's strategic transformation[52][57] - The company's strategic plan focuses on expanding its fiber optics infrastructure, enabling high-speed connections for residential and business customers and supporting 5G technology[58][59] - Court supervision of the Judicial Reorganization Proceeding was extended until March 31, 2022, to allow for the completion of asset sales (UPIs) as stipulated in the amended plan[60][61] Amendment to the JRP: Creditor Payments and Financing The JRP amendment outlines specific payment mechanisms for various creditor classes, including prepayments funded by asset sales, and introduces new financing instruments like BRL 2.5 billion InfraCo Debentures and a USD 880 million Senior Notes issue to support operations and investments - The amended plan details payment proposals for labor, collateralized, regulatory, and unsecured creditors, including options for straight-line payments and prepayments funded by liquidity events like asset sales[64][65][72] - Regulatory claims with ANATEL are being settled under Law 13988, allowing for payment in 84 installments with a 50% discount on the principal[67] - New financing was secured through the issuance of BRL 2.5 billion in InfraCo Debentures to fund fiber network expansion and a USD 880 million Senior Notes issue by Oi Móvel for operational financing until its asset sale is complete[79][87][88] Sale of UPIs and Corporate Restructuring As part of its restructuring, Oi agreed to sell a controlling stake (57.9%) in UPI InfraCo to Globenet for approximately BRL 12.9 billion, a transaction approved by CADE and pending ANATEL's consent, while also completing the upstream merger of Telemar, absorbing BRL 6.16 billion in net assets - Oi agreed to sell a controlling stake in UPI InfraCo to Globenet for BRL 12.92 billion, with Oi retaining the remaining 42.1% of the capital stock[90][91][92] - The partial sale of UPI InfraCo received final and unappealable approval from the Brazilian antitrust authority (CADE) in November 2021, with ANATEL's consent still pending[93][94] Summary of Net Assets from Telemar Merger (May 3, 2021) | Item | Amount (BRL thousands) | | :--- | :--- | | Total Assets Acquired | 29,935,202 | | Total Liabilities Assumed | (23,773,185) | | Merged Net Assets | 6,162,017 | Individual Financial Statements Individual Balance Sheets As of September 30, 2021, individual total assets increased to BRL 55.3 billion from BRL 38.5 billion at year-end 2020, driven by held-for-sale assets and property, plant, and equipment, while total liabilities rose to BRL 54.3 billion from BRL 30.8 billion, and shareholders' equity decreased to BRL 1.06 billion from BRL 7.75 billion Individual Balance Sheet Highlights (BRL thousands) | Account | 09/30/2021 | 12/31/2020 | | :--- | :--- | :--- | | Total Assets | 55,329,866 | 38,525,202 | | Current Assets | 15,332,497 | 6,017,124 | | Non-current Assets | 39,997,369 | 32,508,078 | | Total Liabilities | 54,268,057 | 30,773,710 | | Current Liabilities | 6,704,680 | 3,044,306 | | Non-current Liabilities | 47,563,377 | 27,729,404 | | Shareholders' Equity | 1,061,809 | 7,751,492 | - Held-for-sale assets increased dramatically from BRL 100.6 million to BRL 4.84 billion, reflecting the company's ongoing divestment plan[4] - Non-current borrowings and financing nearly doubled, increasing from BRL 12.9 billion to BRL 22.1 billion[6] Individual Statements of Profit or Loss For the nine months ended September 30, 2021, the company reported a net loss of BRL 6.71 billion, a significant improvement from the BRL 12.33 billion net loss in the prior-year period, with net operating revenue growing to BRL 4.72 billion from BRL 2.52 billion, and basic and diluted EPS at a loss of BRL 1.13 Individual Profit or Loss Summary (YTD - BRL thousands) | Line Item | YTD 09/30/2021 | YTD 09/30/2020 | | :--- | :--- | :--- | | Net operating revenue | 4,724,165 | 2,521,231 | | Gross profit | 716,443 | 506,252 | | Profit (loss) before financial income (expenses) | (4,157,235) | (8,870,455) | | Profit/loss for the period | (6,711,199) | (12,327,833) | Individual Earnings Per Share (YTD - BRL per share) | Share Type | YTD 09/30/2021 | YTD 09/30/2020 | | :--- | :--- | :--- | | Common shares (ON) | (1.13) | (2.07) | | Preferred shares (PN) | (1.13) | (2.07) | Individual Statements of Cash Flows For the nine months ended September 30, 2021, net cash used in operating activities was BRL 110.0 million, a substantial improvement, while net cash used in investing activities was BRL 1.48 billion, a reversal from the prior year, and financing activities provided BRL 430.3 million, resulting in a BRL 1.17 billion decrease in cash and cash equivalents Individual Cash Flow Summary (YTD - BRL thousands) | Activity | YTD 09/30/2021 | YTD 09/30/2020 | | :--- | :--- | :--- | | Net cash from operating activities | (109,964) | (717,588) | | Net cash from investing activities | (1,484,374) | 2,328,865 | | Net cash from financing activities | 430,304 | (246,930) | | Increase (decrease) in cash | (1,167,380) | 1,550,046 | - The significant positive cash flow from investing activities in 2020 was primarily due to BRL 3.66 billion received from a capital reduction in subsidiary PT Participações, which did not recur in 2021[10] - Financing activities in 2021 were positively impacted by BRL 725.1 million in cash acquired through a merger, offsetting lease and tax refinancing payments[11] Consolidated Financial Statements Consolidated Balance Sheets As of September 30, 2021, consolidated total assets slightly increased to BRL 75.5 billion from BRL 73.8 billion at year-end 2020, with BRL 34.4 billion classified as held-for-sale, while total liabilities rose to BRL 74.4 billion from BRL 66.1 billion, and shareholders' equity sharply decreased to BRL 1.08 billion from BRL 7.77 billion Consolidated Balance Sheet Highlights (BRL thousands) | Account | 09/30/2021 | 12/31/2020 | | :--- | :--- | :--- | | Total Assets | 75,529,348 | 73,839,787 | | Held-for-sale assets | 34,413,026 | 20,771,942 | | Property, plant and equipment | 16,508,439 | 24,135,058 | | Total Liabilities | 74,450,232 | 66,069,877 | | Borrowings and financing | 31,339,944 | 26,343,734 | | Shareholders' Equity | 1,079,116 | 7,769,910 | - The reclassification of assets to 'held-for-sale' increased by BRL 13.6 billion, reflecting the progress of the company's divestment plan for its mobile, infrastructure, and TV units[15] - Total borrowings and financing increased by BRL 5.0 billion, primarily in non-current foreign currency debt[17] Consolidated Statements of Profit or Loss For the nine months ended September 30, 2021, the consolidated net loss was BRL 6.71 billion, an improvement from the BRL 12.33 billion loss in the prior-year period, despite a slight decrease in net operating revenue to BRL 6.72 billion from BRL 7.03 billion, with a BRL 536 million profit from discontinued operations offsetting a BRL 7.25 billion loss from continuing operations Consolidated Profit or Loss Summary (YTD - BRL thousands) | Line Item | YTD 09/30/2021 | YTD 09/30/2020 | | :--- | :--- | :--- | | Net operating revenue | 6,716,892 | 7,027,560 | | Gross profit | 1,479,360 | 2,018,457 | | Profit (loss) from continuing operations | (7,249,923) | (11,851,652) | | Profit (loss) from discontinued operations | 536,096 | (475,076) | | Consolidated profit/loss for the period | (6,713,827) | (12,326,728) | Consolidated Earnings Per Share (YTD - BRL per share) | Share Type | YTD 09/30/2021 | YTD 09/30/2020 | | :--- | :--- | :--- | | Common shares (ON) | (1.13) | (2.07) | | Preferred shares (PN) | (1.13) | (2.07) | Consolidated Statements of Cash Flows For the nine months ended September 30, 2021, net cash used in operating activities was BRL 1.63 billion, a significant shift from the BRL 3.54 billion generated in the prior year, while net cash used in investing activities increased to BRL 3.58 billion, and financing activities provided a substantial BRL 4.16 billion, resulting in a BRL 1.09 billion decrease in cash and cash equivalents Consolidated Cash Flow Summary (YTD - BRL thousands) | Activity | YTD 09/30/2021 | YTD 09/30/2020 | | :--- | :--- | :--- | | Net cash from operating activities | (1,631,817) | 3,539,622 | | Net cash from investing activities | (3,576,281) | (1,548,142) | | Net cash from financing activities | 4,163,879 | 1,184,677 | | Increase (decrease) in cash | (1,087,757) | 3,381,165 | - Financing activities were driven by BRL 6.41 billion in new borrowings, net of costs, which was partially offset by BRL 3.51 billion in repayments[23] - Investing activities included BRL 2.30 billion for purchases of tangible and intangible assets and BRL 2.49 billion in cash flows used by discontinued operations[22][23] Notes to the Financial Statements Note 3. Financial Instruments and Risk Analysis The company faces market (foreign exchange, interest rate), credit, and liquidity risks, with 61.4% of its debt in foreign currency, mitigated by natural hedges and derivatives, while floating-rate debt exposes it to interest rate fluctuations, and liquidity is managed through continuous monitoring and new financing like the BRL 2.5 billion InfraCo debentures and USD 880 million Senior Bond - The company's borrowings and financing exposed to foreign exchange risk represent approximately 61.4% of the total[136] - A sensitivity analysis shows that a 25% depreciation of the Brazilian real would result in a consolidated loss of BRL 4.4 billion from foreign exchange exposure, after considering hedges[146] - Approximately 32.3% of the company's debt is subject to floating interest rates, with the most material exposure being to the CDI rate[150] - Liquidity was strengthened in 2021 with the issuance of BRL 2.5 billion in InfraCo debentures and a USD 880 million Senior Bond by Oi Móvel to fund CAPEX and operations[161][162] Note 19. Borrowings and Financing As of September 30, 2021, total consolidated borrowings and financing reached BRL 31.3 billion, up from BRL 26.3 billion at year-end 2020, comprising Senior Notes (BRL 14.1 billion), debentures, and financial institution loans, with a significant portion in foreign currencies, and BNDES financing covenants temporarily suspended Consolidated Borrowings and Financing by Type (BRL thousands) | Type | 09/30/2021 | 12/31/2020 | | :--- | :--- | :--- | | Senior Notes | 14,060,359 | 9,000,226 | | Debentures (Public & Private) | 9,482,604 | 10,851,658 | | Financial Institutions & Other | 22,576,047 | 21,666,937 | | Subtotal | 46,119,010 | 41,518,821 | | Less: Debt Discount & Costs | (14,779,066) | (15,175,087) | | Total | 31,339,944 | 26,343,734 | - In July 2021, Oi Móvel issued USD 880 million in Senior Notes due 2026 and BRL 2.0 billion in debentures due 2022 to strengthen cash and repay existing debt[243][244] - Financial ratio covenants in the BNDES financing agreement are temporarily stayed until at least the financial settlement of the UPI Mobile Assets sale or May 30, 2022, whichever comes first[251] Note 24. Provisions and Contingent Liabilities As of September 30, 2021, the company held consolidated provisions totaling BRL 5.33 billion for labor, tax, and civil claims, with civil claims (including ANATEL) being the largest at BRL 2.80 billion, and also identified BRL 31.3 billion in contingent liabilities with a possible unfavorable outcome, primarily tax-related (BRL 28.6 billion) Consolidated Provisions by Type (BRL thousands) | Type | 09/30/2021 | 12/31/2020 | | :--- | :--- | :--- | | Labor | 1,413,052 | 1,796,620 | | Tax | 1,114,031 | 1,225,417 | | Civil | 2,800,165 | 2,788,426 | | Total Provisions | 5,327,248 | 5,810,463 | Consolidated Contingent Liabilities (Possible Loss) (BRL thousands) | Type | 09/30/2021 | 12/31/2020 | | :--- | :--- | :--- | | Labor | 223,646 | 299,178 | | Tax | 28,643,988 | 28,419,340 | | Civil | 2,439,513 | 2,464,987 | | Total Contingencies | 31,307,147 | 31,183,505 | Note 30. Held-for-Sale Assets and Discontinued Operations The company classified its UPI Mobile Assets, UPI InfraCo, UPI TVCo, and international operations as held-for-sale, totaling BRL 34.4 billion in assets and BRL 13.9 billion in associated liabilities as of September 30, 2021, with these discontinued operations generating a BRL 536.1 million profit for the first nine months of 2021, a significant turnaround from a BRL 475.1 million loss in the prior-year period Consolidated Held-for-Sale Assets and Liabilities (BRL thousands) | Category | 09/30/2021 | 12/31/2020 | | :--- | :--- | :--- | | Assets from Sale of UPIs | 34,277,735 | 20,625,007 | | Assets from International Operations | 83,106 | 99,633 | | Total Held-for-Sale Assets | 34,413,026 | 20,771,942 | | Liabilities from Sale of UPIs | 13,907,712 | 9,152,947 | | Liabilities from International Operations | 30,091 | 42,429 | | Total Associated Liabilities | 13,937,803 | 9,195,376 | Profit (Loss) from Discontinued Operations (YTD - BRL thousands) | Line Item | YTD 09/30/2021 | YTD 09/30/2020 | | :--- | :--- | :--- | | Pretax profit (loss) | 1,425,697 | (474,401) | | Income tax and social contribution | (889,601) | (675) | | Profit (loss) for the period | 536,096 | (475,076) | Note 31. Other Information The company is cooperating with an investigation related to "Operation: Mapa da Mina," though an internal review found no illegalities, and maintained operational continuity during COVID-19 with remote work and safety protocols, while also detailing the complex corporate restructuring to form UPI InfraCo through capital increases and partial spin-offs - An independent internal investigation related to "Operation: Mapa da Mina" did not identify any indications of illegalities committed by the company[337] - The company maintained operational continuity during the COVID-19 pandemic by implementing remote work for ~71% of its workforce and safety protocols for essential field technicians, with no material deviations in operations or results recorded[339][340][344] - The formation of UPI InfraCo involved a series of complex corporate restructuring steps, including multiple capital increases and partial spin-offs of the subsidiary BrT Multimídia throughout 2020 and 2021[345][346][351]